When making a Will, many people choose to make provision for a charity or charities in their Will, mainly for personal reasons, however this can also be an effective way to reduce the amount of inheritance tax payable on your estate.
If your estate is over £1 million, and there are no exemptions or reliefs available to you, your estate will be subject to inheritance tax on your death at a rate of 40%.
However, if you leave at least 10% of the baseline value (after deductions) of your estate to charity, the rate of inheritance tax is reduced from 40% to 36%.
To see how this would work, please see the illustration below:
Your net estate is £2 million and there are no exemptions or reliefs available (i.e. not married so no spouse exemption is available). Your estate would benefit from the inheritance tax allowance (currently £325,000 for an individual (2020/21 tax year).
Your chargeable estate would then be £1,675,000 after deductions and this would be subject to inheritance tax at 40%. Your estate would pay £670,000 in tax, leaving £1,330,000 for your beneficiaries.
If you decided to leave 10% of your estate to charity, which would be a legacy or a share of your residuary estate at a value of £200,000, your estate would pay a reduced rate of tax at 36% instead of 40%. Your chargeable estate would be £1,475,000, as the gift to charity is exempt and the estate is reduced by the amount of this gift. This would result in an inheritance tax bill of £531,000 instead of £670,000. Your beneficiaries would inherit £1,269,000.
This would mean that your beneficiaries would receive less from your estate, however, the charity will receive £200,000 at a net cost to your beneficiaires of £61,000. (£1,330,000 – £1,269,000). Leaving at least 10% to charity can be appealing to those who want to be more tax-efficient with the assets in their estate and benefit their chosen charities.
Please note that the illustration above is a straightforward calculation based on general property held in an estate, therefore the position can be more complex if there is a wide range of assets in the estate to consider.
If you would like further advice on inheritance tax planning or have any queries about how to reduce your tax liability, please do not hesitate to contact one of our Private Client Solicitors within our Private Wealth sector, who have specialist knowledge on all aspects of wealth planning for high net worth individuals.
