If you are interested in how charities could benefit from a Will, you may not realise how effective a gift could be.
A legacy in a Will or through the variation of an inheritance could help charities at little or no cost to you or your family, thanks to a relief from inheritance tax that tends to pass under the radar. Sometimes you can actually benefit at the government’s expense!
Gifts made by Will to charities are free of inheritance tax (IHT) in the same way as lifetime gifts. However, if at least 10% of a taxable estate goes to charity, the inheritance tax payable on the rest of the estate is reduced from 40% to 36%.
If you leave a legacy in your Will, and use a formula of words that ensures you meet the 10% rule, it will reduce the tax payable on your estate. This new relief was introduced five years ago but has been used far less than it could have been.
You can make the same saving if you vary an inheritance from a relative or friend within two years of their death. In certain circumstances giving to charity will cost your family only 24% of your chosen amount.
Even better, if your relative’s Will has left even 4% of their taxable estate to charity, increasing the gifts to (any) charity from 4% to a total of 10% actually leaves the residuary estate unchanged.
If the charity gifts were in excess of 4%, it is better still. In this case, increasing the charity total to at least 10% means the residue left over is greater. If you are a residuary beneficiary, you can choose to redirect part of your inheritance in this way and yet be better off at the end of the day. The government pays for the whole of your gift!
Alice is a spinster who dies leaving £575,000 in her estate and a legacy of £20,000 to Age UK, with the rest to her nephew Peter. After deducting the IHT Nil Rate Band (NRB) of £325,000, the 10% is worked out on the £250,000 balance. So the £20,000 gift falls below the 10% threshold and there is no reduction in Peter’s IHT of £92,000 (40% of £230,000).
But if Peter varies the estate by completing a deed of variation within two years of Alice’s death, to leave just an extra £5,000 to his own choice of charity - it doesn’t need be Age UK - the total of £25,000 hits the magic 10%. This reduces the IHT payable to £81,000, with that £11,000 saving shared between the new charity’s £5,000 and an extra £6,000 for Peter!
Brian is divorced and dies leaving £675,000 and his whole estate to his son John. As his home qualifies for the new Residence Nil Rate Band (RNRB) he has an extra £100,000 IHT allowance, taking his total allowance to £425,000. So the net estate has the same £250,000 value as Alice’s, there is no charity gift, and John should normally pay IHT of £100,000 (40% of £250,000). But If John made a Deed of Variation giving £25,000 to any charity, the IHT payable is reduced to £81,000. John would then receive £569,000 instead of £575,000. But he only has to give up £6,000 of his legacy to make a £25,000 gift to his chosen charity – he pays 24% and the government 76%.
There is so much potential to save more tax by giving more to charity. We can advise on the figures, and draft the provisions needed in a Will or deed of variation, to take full advantage of this under-used and invaluable tax relief.
Published: 11 May 2017
A moment of clarity
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