This blog post was updated on 5 September 2022 as part of our ‘Remember a Charity Week 2022’ campaign.
There are two points that you need to be aware of when considering making a gift to charity in your will.
The first of them is straightforward: all gifts you make to a registered charity are free of inheritance tax.
If you were to leave the entirety of your estate to charity, you will pay no inheritance tax on your estate whatsoever. If you were to leave a just £100 to a charity, then whilst there may be tax on other parts of your estate, the £100 would be tax free.
The second point is a little more complicated.
If you leave more than 10% of your estate to charity, then the rate of tax on the rest of your estate falls to 36%, from the usual 40%. This can potentially lead to a situation where leaving more money to charity results in more money going to your family.
To explore this second point, we have set out an example.
Three sisters, Marcia, Jan and Cindy all pass away leaving an estate of £2 million. Each of them is a widow with their own nil-rate band and residential nil-rate band, and the same available for transfer from their late spouses, making a total of £1,000,000 in inheritance tax allowances. Each of them is considering leaving money to charities that support causes that mean something to them. They all have children who would receive the balance of their estate.
| Marcia | Jan | Cindy | |
|---|---|---|---|
| Estate gifted to charity | Marcia decides to leave nothing to charity. | Jan leaves £90,000 to charity. | Cindy leaves .£100,000 to charity. (£10,000 more than Jan did) |
| Estate | £2,000,000 | £2,000,000 | £2,000,000 |
| Less: Nil-rate bands | £1,000,000 | £1,000,000 | £1,000,000 |
| Subtotal | £1,000,000 | £1,000,000 | £1,000,000 |
| Less: Gift to charity | £0 | £90,000 | £100,000 |
| Taxable | £1,000,000 | £90,000 | £100,000 |
| Tax at | 40%: £400,000 | 40%: £364,000 | 36%: £324,000 |
| Estate received by children | Marcia’s children receive: £1,600,000 | Jan’s children receive: £1,546,000 | Cindy’s children receive: £1,576,000 |
On Marcia’s death, her children receive the most of the three, but her estate suffers the most tax. Cindy’s charitable legacy exceeded the threshold at which the tax rate falls to 36%. So not only, has her charity received more than Jan’s, but also her children received more than Jan’s.
The above figures provide a basic overview but the way in which the 10% minimum is calculated is slightly more complicated. The calculation is based on something known as the ‘baseline amount’, which in simple terms is the estate in someone’s sole name (not including jointly held assets or assets held in trust) less debts, funeral costs and inheritance tax allowances.
If you are thinking of benefitting a charity and you want to ensure that this is done in the most tax efficient way possible, your solicitor will be able to write a will which ensures the baseline amount is applied correctly.
