Are you thinking of leaving a charitable gift in your Will?

Paula Patton, private client solicitor at our Birchington office, explains how a charitable gift can help you achieve a double advantage, namely, a positive legacy for the future and your estate could benefit from the potential tax advantage of such gifts.

Throughout the pandemic, charities have seen a huge decrease in their income, partly through people ceasing charitable giving while facing potential financial difficulties and also through charitable events, such as sponsored runs, being cancelled. While many charities have come up with innovative ideas to maintain some income, such as virtual events, the overall impact on charities, large and small, has been significant.

A huge part of the income that charities receive comes from gifts in wills and such income is becoming ever more important in keeping charities afloat and able to deliver vital services when other income has substantially reduced.

Gifts to charity can consist of:

• a cash sum
• a specified property or asset, or
• a share or the whole of your residuary estate.

When deciding to leave such a gift in your will, you will undoubtedly feel good about the positive legacy you will leave in enabling the charity to carry on vital work. Further, your gift may lead to a reduction in any inheritance tax which may otherwise have been payable upon your estate. This is because gifts in wills to UK qualifying charities are inheritance tax (IHT) free.

Examples of how to leave money to a charity in your Will

For simplicity, these three examples are based upon the deceased having never married or had children in which case the inheritance tax nil rate band (IHT NRB) of £325,000 tax free is available (i.e. the value by which their estate exceeds £325,000 would normally attract IHT at 40%.)

Where a person is married or in a civil partnership and/or has children or stepchildren, additional tax free bands may be available.

Example 1: Charitable gift reducing the value of an estate for IHT purposes

Joan died on 1 January 2021 leaving an estate worth £450,000. In Joan’s will, she left £10,000 to a qualifying charity and the balance of the estate to her cousin.

Had Joan not made a gift to charity, the value of the estate for IHT purposes would have remained at £450,000 which would have meant a taxable estate of £125,000 (total estate of £450,000 less IHT NRB of £325,000) upon which tax at 40% would have amounted to £50,000, so there was a tax saving of £4,000 plus the added bonus of gifting to a charity close to Joan’s heart.

Example 2: Charitable gift reducing IHT payable from 40% to 36%

Richard also died on 1 January 2021. Richard left an estate of £600,000. In his will, Richard left £30,000 to a qualifying charity, with the balance of Richard’s estate going to his cousin.

The value of the estate in excess of the IHT NRB of £325,000 is 275,000 (total estate of £600,000 less £325,000 IHT NRB). 10% of 275,000 is 27,500 so the qualifying donation to charity of £30,000 represents more than 10% of this baseline amount. The estate therefore qualifies for reduced IHT on the taxable estate of 36%, rather than 40%.

The IHT payable on Richard’s estate is therefore £88,200 (taxable estate of £245,000 at 36%). Had Richard not left the gift to charity, the taxable estate would have amounted to £275,000 (£600,000 less £325,000 IHT NRB) upon which tax would have been payable at 40% giving a total IHT liability of £110,000. In this scenario, there was a tax saving of £21,800 which represents  over two thirds of the gift to the charity so the gift to charity effectively costs the estate £8,200 meaning both a tax saving and a gift to a charity close to Richard’s heart.

In addition, where a person leaves a large part or the whole of their estate to a charity or charities, the application of the charity exemption means that the portion that is left to charity will not be taken into account when valuing their estate which is likely to mean that there is no inheritance tax to pay at all.

Example 3: Charitable gift resulting in no IHT

Naomi also died on 1 January 2021 leaving two thirds of the estate to a qualifying charity and the remainder to Naomi’s cousin.

Had Naomi left the whole estate to her cousin, IHT would have been payable on the taxable estate of £275,000 (total estate of £600,000 less IHT NRB of £325,000) at 40% meaning a total IHT liability of £110,000. However, as the two thirds gift to charity has now reduced the taxable estate to £200,000, this falls below Naomi’s IHT NRB of £325,000 so there is no IHT to pay.

How we can help

If you are interested in making or amending your will to include a gift to a charity or charities, please speak to our private client team who will be happy to discuss the best way to go about this. Please remember, all legacies to charities, however small, are hugely appreciated by them and contribute to the wonderful work they carry out on a daily basis. Without charitable giving and gifts in wills, some charities will cease to exist in the future.

A relatively small donation can go a long way

As reported in The Telegraph on 7 September 2020, “A little cash can go a long way for charity”

• £4 will pay for a counsellor to answer a child calling Childline. NSPCC
• £2,000 would enable four musically talented young people from low-income families to receive a grant and a year of support for their music-making. Awards for Young Musicians
• £5 will help buy equipment that researchers need to grow cells for their work. British Heart Foundation
• 1% of a £5,000 estate will kit out an assistance dog with a high-vis jacket and specialised harnesses. Support Dogs
• 0.1% of a £90,000 estate could pay for a class of 30 primary school children to receive the NSPCC’s Speak Out, Stay Safe programme to help protect them from abuse. NSPCC
• £300 could feed 10 families in Syria for one month. British Red Cross
• £1,000 could pay for four research study participants to have detailed MRI scans of their hearts. British Heart Foundation

Wlls, EU charities and Brexit

Reference to UK charities should be noted as following the UK’s departure from the EU, the position with gifts to EU charities is now uncertain, so if EU charities are included in your Will and this has been done partly to reduce inheritance tax payable upon your estate, you may wish to review your Will.

Paula Patton can be contacted on 01843 842356 or by email. If you already have a Will Paula could review it for you.