Why you should consider including charitable bequests within your Will

A recent article in the Daily Telegraph reported that there has been a 61% increase in the number of people who are including charitable legacies within their Wills.  It is possible that this increase is a direct result of the pandemic and the economic side effects, most notably the sharp rise in house prices and the freeze in tax allowances, as more and more people are looking to get their affairs in order to preserve their wealth for future generations.

The obvious question that follows is: how can donating to charity help you to preserve your wealth? Put simply, charitable legacies are extremely tax efficient as they are exempt from Inheritance Tax.

The general rule for Inheritance Tax is that it is payable when a person dies leaving assets worth more than £325,000 (or £650,000 for married couples).  Subject to additional allowances which may apply in relation to the family home, the balance above that threshold, known as a person’s “Nil Rate Band”, is taxed at 40%.

When calculating whether there is any Inheritance Tax payable on a person’s estate, any money passing to a UK registered charity will be exempt and therefore excluded from the taxable value of the estate.  If your overall wealth is therefore sitting close to or above the Nil Rate Band, you could mitigate or avoid an Inheritance Tax liability by leaving a portion of your estate to charity.  This could be in the form of a pecuniary legacy which bequeaths a cash lump sum to charity, a specific legacy of an item (such as a painting or even a property) or a share of the “residue” of your estate, being everything you own at the time of your death after payment of debts and funeral expenses, legacies and the costs of attending to the administration of your estate.

Crucially, if 10% or more of your overall estate value is bequeathed to a charity or multiple charities, your estate will benefit from a reduction in the rate of Inheritance Tax from the usual 40% to 36%.  While this may not seem like a huge amount, it can potentially result in a significant tax saving if, despite the charitable legacies, your estate’s taxable value is nevertheless over the Nil Rate Band.

The Inheritance Tax exemption for charities applies equally if a gift is made to a UK registered charity during lifetime.  Whereas gifts beyond annual allowances usually require the donor to survive seven years in order for the value of the gift to fall outside of the estate and become exempt from Inheritance Tax, there is no such requirement for charitable gifts.  Instead, these will fall outside of the donor’s estate as soon as the gift has been made.

Aside from the sense of satisfaction and happiness that often results from contributing to a worthwhile cause, charitable giving can therefore have financial benefits and is a very simple yet effective way of preserving wealth by reducing or avoiding an Inheritance Tax liability and should be considered as part of your overall estate planning, we can assist you in ascertaining how much you may want to leave to charity to achieve the maximum benefit.