Legacy gifts are vitally important to charities, often making up a large proportion of their income. Many people choose to use their Will to support a favourite charity. Not only will this enable the charity to continue and develop their cause, it could have inheritance tax advantages for your estate.
This is a complex area where expert tax and/or legal advice may be necessary. Please chat with us if you need help finding an advisor.
Any outright gift in your Will (or during your lifetime) to a UK charity will be exempt from inheritance tax. The exemption also applies to gifts to charities in the EU, Norway, Iceland and Liechtenstein. Gifts to charitable trusts from which only these charities can benefit also qualify for the inheritance tax exemption.
The exemption does not have a value limit. So if you were to leave your entire estate to a UK charity, the gift would be completely free of inheritance tax.
If you leave 10% or more of your net estate (i.e. your total assets less liabilities) to charity, you could benefit from a reduction in the rate of inheritance tax from 40% to 36% on the rest of your estate. This lower rate applies to the Wills of anyone who dies on or after 6 April 2012.
The effect of this is that if you were already planning to leave 4% of your estate to charity, you could now think about increasing this to 10%. More money would pass to charity, yet your family would receive the same inheritance, or possibly more, once the tax reduction is taken in account.
This example will help explain.
When Mark died, his estate was valued at £1,000,000.
He had his full nil rate band available. (To keep it simple, we're saying that Mark did not own his own home, so there was no residence nil rate band.)
He left a legacy of 4% of his net estate (i.e. his residuary estate less the nil rate band) to a UK charity.
The remainder of his estate passed to his children.
The UK charity received £27,000 and his children received £713,800, after inheritance tax of £259,200 was paid (at the rate of 40%).
If Mark had left a legacy of 10% of his net estate to the UK charity, the lower inheritance tax rate of 36% would have applied to his estate.
So less inheritance tax would be due on Mark’s estate (£218,700 compared with £259,200).
The UK charity would receive a larger legacy of £67,500 compared with £27,000.
Mark’s children would receive the same amount (£713,800) regardless of whether 4% or 10% of Mark’s net estate went to charity.
The table below illustrates this point:
| 4% charitable legacy | 10% charitable legacy |
Residuary estate | £1,000,000 | £1,000,000 |
Available nil rate band | £325,000 | £325,000 |
Amount passing to charity | £27,000 | £67,500 |
Inheritance tax | £259,200 | £218,700 |
Amount passing to other non-exempt beneficiaries | £713,800 | £713,800 |
There are two straightforward ways to structure your Will to take advantage of this lower rate of inheritance tax.
You could leave your estate on discretionary trusts with a letter of wishes to your executors requesting that 10% or more passes to charity. It would be possible to name the charities as discretionary beneficiaries or to give the executors power to nominate charities. If this is done, and your executors exercise their powers within two years of your death, then the 36% rate should apply.
Alternatively, your Will can include a clause specifying the charitable bequests, including a condition that those bequests are not to take effect if the lower tax rate does not apply.