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Inheritance Tax and Gifts to Charity - What are the Benefits?

What is inheritance tax?

Inheritance tax is charged on any estate you leave in your will over a certain threshold, also known as the nil rate band. Currently, inheritance tax is charged at 40% on any estate valued at more than £325,000. Anything you leave that is above the value, may incur inheritance tax. If your estate is taxable, then the executor of your will has to pay this before your estate can be distributed. This can lead to them taking out loans. When considering inheritance tax and gifts to charity, you should also know that leaving a sizable charitable gift can help lessen the rate of tax you pay.

What are the tax benefits of donating to charity?

UK-registered charities are exempt from inheritance tax. That means when giving to charity, tax benefits can become an added bonus. When you leave a gift to charity in your will, known as a charitable legacy, it doesn’t count towards your nil rate band. This means you are free to leave as much as you like to charity, and if you leave 10% or more to charity in your will, you will earn a lower inheritance tax rate of 36%. In some cases of leaving money to charity, inheritance tax can be eliminated altogether if it brings you below the nil rate band.

For example:

  • If you leave your estate, valued at £400,000, to your only child, this is above the nil rate band. 

  • The £75,000 that remains over the threshold would be charged at 40%, meaning your estate has to pay £30,000 in inheritance tax

If you were to leave some money to charity, your inheritance tax would be reduced:

  • You choose to leave £7,500 to charity, which is 10% of your £75,000 taxable estate

  • As 10% of your estate now falls under you leaving money to charity, tax benefits mean the remainder of your estate (£67,500) is now taxed at the lower rate of 36%

  • Your estate now pays £24,300 in inheritance tax

You should always consult a financial professional if you are looking to reduce your inheritance tax through charitable legacies. The precise way your estate will be charged will depend on your personal circumstances. Leaving money to charity, inheritance tax bands, executors, asset locations, and other matters may affect which tax rate you pay.

Do charities pay inheritance tax?

No. When leaving money to charity, inheritance tax is not charged on it, so neither your executor nor the charity themselves will need to pay towards it.  

What types of charitable legacy can I leave?

There are three types of charitable gifts to consider when giving to charity, tax benefits may be possible with each type:

  • A residuary legacy: this leaves a share of your estate to your chosen charity after debts, funeral costs, and other legacies have been paid

  • A pecuniary legacy: this is a specific sum of money which can be index-linked to protect its value

  • A specific legacy: this leaves a particular item which can be sold or used by the recipient 

When giving to charity, tax benefits will vary depending on how much your estate is worth, regardless of the actual figure you leave as a donation. For example, a £40,000 donation is incredibly generous, but if your total estate is worth £1 million, it cannot qualify for the lower tax band. To ensure the lower inheritance tax band, you will need to leave 10% or more. As the price of your estate can fluctuate, you may want to write into your will that you will leave 10% precisely, rather than a fixed sum.

 

Inheritance tax for injured veterans 

The estate of veterans may be made exempt for inheritance tax if they have passed away due to an injury suffered or disease contracted while on active service. Should these causes be found to have hastened their death, the family of the serving or former member who has passed away may not need to pay inheritance tax.