Leaving a charitable legacy within a Will
Whilst most people understand that leaving a Will ensures that your money is paid in accordance with your wishes in the event of your death, many are unaware of the benefits of leaving a charitable donation as part of their Will.
Government funding to charities is often extremely limited, so many charities rely heavily on donations and legacy payments made through Wills as their main source of income.
Leaving a charitable donation not only gives comfort that in the event of your death your money will be used for a good cause but it also has the added benefit of reducing the amount of inheritance tax payable by your beneficiaries.
When making a charitable donation, the full sum to be paid to the charity is paid to them tax free. However, where this donation is equal to, or more than, 10% of your net estate it has the added benefit of reducing the Inheritance tax payable by your beneficiaries from 40% to 36%. Whilst giving away 10% to gain a tax reduction of 4% doesn’t initially sound very attractive because this is calculated on your net estate after taking off the nil rate bands, when you look at the figures this can look attractive for clients who have an interest in charitable giving.
I have given an example of how this works below.
Assumptions:
- A married couple who have children and a joint estate valued at £2,000,000.
- These calculations are based on the second of their deaths and assumes that on the first death the full estate and nil rate bands were passed onto the surviving spouse.
- They have £200,000 invested in pensions. (Pensions do not normally form a part of your estate for the calculation of inheritance tax).
- They have a combined standard nil rate band (NRB) of £650,000, (£325,000 each) plus the additional Residential Nil Rate Band (RNRB) of £175,000 each totalling £350,000. Giving them a total NIL rate band of £1m.
(The RNRB of £175,000 each is available to those with estates valued under £2m and who own a residential property which is to be passed onto their children or grandchildren. For estates greater than £2m, the RNRB is tapered)
In this example, after deduction of the relevant nil rate bands and pensions their taxable estate is £800,000.
The first table below assumes that no donation is made.
| No Charitable Donation | |
| Estate Value | £2,000,000 |
| Standard Nil Rate Band | £650,000 |
| Residential Nil Rate Band | £350,000 |
| Less Pensions | £200,000 |
| Charity Donation | £0 |
| Amount Liable to IHT | £800,000 |
| IHT Charge @40% | £320,000 |
| No Charitable Donation | |
| Amount Beneficiaries Receive | £1,680,000 |
| Amount Charity Receives | £0 |
As you can see Inheritance tax of £320,000 is payable and the beneficiaries received a payment of £1,680,000 after deduction of this tax.
The example below is for the same couple but assumes that £80,000 (10% of their taxable estate) is left in their Will as a legacy to a registered charity.
| 10% Charitable Donation | |
| Estate Value | £2,000,000 |
| Standard Nil Rate Band | £650,000 |
| Residential Nil Rate Band | £350,000 |
| Less Pensions | £200,000 |
| Less Loan Trust Gain | £0 |
| Charity Donation | £80,000 |
| Amount Liable to IHT | £720,000 |
| IHT Charge @36% | £259,200 |
| 10% Charitable Donation | |
| Amount Beneficiaries Receive | £1,660,800 |
| Amount Charity Receives | £80,000 |
| Difference in inheritance | £19,200 |
As you can see inheritance tax of £259,200 is payable and the charity receives a payment of £80,000 leaving £1,660,800 payable to the beneficiaries after the deductions.
The difference in the amount received by the beneficiaries in the two scenarios is £19,200.
Looking at it another way, a donation of £80,000 has cost the beneficiaries of the estate £19,200.
In order to make a provision for a charitable donation within your Will you should speak to your solicitor.
What Next?
If you would like to discuss leaving a charitable donation in your Will further, please contact your usual adviser.
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