Lots of people worry about Inheritance Tax but the good news is that leaving a gift to charity in your Will can help reduce, or even remove, the tax burden on your estate.
Your legal adviser will be able to explain how the Inheritance Tax rules apply to you and your particular circumstances. As a charity we’re not able to offer legal or tax advice, and the information below is offered for guidance only.
What is inheritance tax?
Inheritance Tax (IHT) is charged at a rate of 40 per cent on estates over the IHT threshold. The threshold, also known as the nil rate band, is currently set at £325,000. This means that any part of your estate above that value may be taxed.
Mr Smith’s estate is worth £400,000 when he dies.
The sum of £75,000 above the nil rate band attracts an Inheritance Tax bill of £30,000. (40 percent of £75,000 = £30,000).
If your estate is eligible for IHT your Executors will need to pay that bill before they can distribute your estate; potentially having to take out an interest paying loan in order to do so.
What are the tax benefits of leaving a legacy to charity?
UK-registered charities are exempt from Inheritance Tax so a gift to charity in your Will doesn’t count towards the nil rate band; reducing the taxable valuable of your estate.
Mr Smith’s estate is worth £400,000 when he dies. In his Will, Mr Smith included charitable legacies adding up to £75,000. This amount is subtracted from the taxable value of his estate, meaning there is no IHT to pay.
The 10 per cent rule
Leaving a gift of 10 per cent or more of the net estate value over the IHT threshold to charity can reduce the rate of Inheritance Tax payable on your estate from 40 per cent to 36 per cent.
To ensure your Will is drafted correctly to take advantage of the reduced IHT rate we strongly advise you to use an experienced legal adviser.
Other exemptions that affect your Inheritance Tax bill
As well as charitable legacy-giving there are a number of measures that may help reduce your estate’s IHT liability. Your legal adviser will inform you of any that are relevant to your circumstances and help you plan your Will accordingly.
The following information is offered for guidance only.
Spouse or civil partner exemption
Married couples and civil partners benefit from “spouse or civil partner exemption”. This means assets can be passed from one spouse or civil partner to another during their lifetime or after death without attracting IHT, on condition that the partner receiving the assets is domiciled (has their permanent home) in the UK.
Transferable nil rate band
The nil rate band allowance of £325,000 applies to each individual. If one member of a married couple or civil partnership dies without making full use of their nil rate band, the remaining proportion of the allowance can be transferred to the surviving partner. This is known as the transferable nil rate band, or TNRB for short.
If the first partner dies and leaves everything to their spouse of civil partner, there is no IHT to be paid on the estate. Their full nil rate band allowance can then be added to that of the second spouse or civil partner; meaning their estate would not be eligible for IHT unless it was worth more than £650,000.
Residence nil rate band
If your estate is worth more than the Inheritance Tax threshold when you die, it may qualify for an additional allowance called the residence nil rate band (RNRB).
The RNRB can help reduce the tax liability of your estate if you leave the family home to direct descendants such as your children and grandchildren.
At the time of writing (September 2021) the RNRB is worth an additional £175,000 to the nil rate band allowance. In estates where the residence was passed from a spouse or civil partner, their RNRB may also be applicable.
Please seek professional advice if you would like to take advantage of the RNRB when writing your Will, as the rate of allowance can vary.
Inheritance Tax exemptions for injured military veterans
An estate may be granted exemption from Inheritance Tax if the deceased was a serving or former member of the armed forces and the Ministry of Defence (MOD) agree they died from an injury suffered or disease contracted while on active service, or if their injury or illness can be shown to have hastened their death.
An exemption may also be granted if the deceased was targeted and killed because they were a serving or former member of the armed forces.
To consider an application for exemption the MOD will require access to the veteran’s full medical records, and each case is assessed on its own merit.
To find out more call Veterans UK on
0808 1914 218 or visit the Government’s Support for War Veterans webpage.
Lifetime tax-free gifts
The taxable value of your estate can also be affected by certain gifts made during your lifetime. These include
gifts made more than seven years before your death
gifts made for public benefit, for example to galleries, museums or political parties
wedding gifts of £5,000 to your children or £2,500 to your grandchildren
general gifts up to a total of £3,000 a year.
What types of gift can I leave to charity?
There are three main types of gift to consider when planning your Will. Depending on your circumstances, your adviser may recommend a particular type of legacy to help you reduce the taxable value of your estate.
A share of your estate (a residuary legacy) to be made after debts, funeral costs and other legacies have been paid.
A specific amount of money (a pecuniary legacy), which can be index-linked to protect its value.
A particular item (a specific legacy), which can be sold or used by the recipient.
For more information about leaving a gift in your Will, download our free Legacy booklet (PDF).
Do I really need to get professional advice?
You should always consult a legal professional if you are looking to reduce your inheritance tax through charitable legacies.
Everyone’s circumstances are different and the way in which your estate’s value is calculated depends on a number of different factors.
Expert advice can help safeguard your family’s future security and save them the distress and cost of complications after you’ve gone.
Check out our free Will-writing service for professional help.
The Government’s own webpages on inheritance tax contain lots of helpful information and useful examples.
If you are the Executor of an estate, HM Revenue and Customs offer an Inheritance and Probate Helpline on 0300 123 1072.
To find a solicitor visit the Law Society and search for a specialism in Wills, Trusts and Probate in your area or postcode.
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