Are you planning to leave something to charity in your Will? If so, did you know that there is a lower rate of inheritance tax if you leave 10% or more of your net estate to charity? This means you can leave more to charity on your death with less impact on other non-charity beneficiaries.
This is how it works…
On death, inheritance tax (“IHT”) is charged at 40% on the value of what you own in excess of the available Nil Rate Band (“NRB”), currently £325,000. The NRB is the amount which you can give away without IHT being payable. It is reduced by the value of any gifts made in the 7 years before your death, and gifts to a spouse are exempt from IHT.
Gifts to UK charities are also exempt from IHT. This exemption also applies to gifts made to equivalent organisations in Europe, Iceland and Norway. If you leave 10% or more to charity, the rate of IHT on the rest of the estate (i.e. the part not left to charity or a spouse) is reduced to 36%. This reduced IHT rate means that by leaving more of your estate to charitable beneficiaries the amount left to your non-charitable beneficiaries may also increase.
Here is an example, with a net estate worth £750,000 at death, no lifetime gifts or residence nil rate band (Read about the residence nil rate band here) to take into account:
You leave £60,000 (8% of your net estate) to qualifying charities and the rest to your children.
A total of £385,000 (the £60,000 charitable gift plus your available NRB at £325,000) passes free of IHT. The remaining £365,000 is charged to IHT at 40%, being £146,000.
Your children receive £544,000.
You leave £75,000 (10% of your net estate) to qualifying charities and the rest to your children.
A total of £400,000 (the £75,000 charitable gift plus your available NRB at £325,000) passes free of IHT. The remaining £350,000 is charged to IHT at the reduced rate of 36%, being £126,000.
Your children receive £549,000.
This is a ‘cliff-edge’ tax relief which does not have a gradual scale. Once you cross the 10% line your estate becomes eligible. Of course this is only a simple example and it is important to work out the implications based on your specific circumstances.
Please get in touch if you would like to discuss gifts to charities or any other matters relating to your Will. You can contact Hannah Baker on 01892 506 057 or at firstname.lastname@example.org