Inheritance Tax and charities: what happens when you give?

In recent years, there has been a major growth in the number of people leaving money to charity in their Wills. According to UK Fundraising, 21% of charity donors aged 40 or older have included a charitable gift in their Will. This is up from 14% in 2010. While leaving money to good causes is a praiseworthy activity, it can also help lower your Inheritance Tax bill. In this post, we look at Inheritance Tax and charities, showing you how the two are related to each other.

An increase in major legacies

According to this report by IFA Magazine, there has been a major uplift in the number of people leaving more than £1m to charities in their Wills. According to HMRC statistics, £1m + legacies totalled £1.12bn in 2021-22. This is up from £850m the previous year.

The amount left by people bequeathing charitable legacies of under £1m also rose slightly. In 2021-22, these gifts totalled £950m. This is an increase of £10m on the previous year.

While all of these legacies are a reflection of a donor’s generosity, some will certainly have been made to reduce Inheritance Tax (IHT) bills.

Inheritance Tax and charities: how does it work?

Let’s take a closer look at the interplay between Inheritance Tax and charities.

We’ve already blogged extensively on Inheritance Tax. You can find a full list of these posts here. If you are interested in IHT thresholds and exemptions, this post is particularly helpful.

When it comes to charitable donations, there are two main ways IHT and charitable donations affect each other.

Firstly, you can donate the following to charities in your Will:

• A fixed amount of money
• An item (such as a valuable painting or antique)
• The residue left after other gifts are distributed

In each of these cases, these donations are deducted from the value of your estate before Inheritance Tax is calculated. This helps to reduce your overall Inheritance Tax bill.

The benefits increase if you leave 10% or more of your net estate to charity. If you do this, not only is the charitable bequest tax free, but you get a 10% discount on the IHT payable by the rest of the estate. In other words, you’ll pay 36% rather than 40% on the residue.

However, before you rush to change your Will, we strongly recommend you get advice first. Our Inheritance Tax planning experts will be able to answer your questions on Inheritance Tax and charities.

Potential pitfalls of leaving money to charities

If you do leave money to charity in your Will, there are various pitfalls you need to be aware of. This article on the This is Money website offers some good advice. Some of the things you need to bear in mind include:

• The changing value of your estate. The value of your estate can be affected by a variety of factors. These include the value of your investments, property prices and future care costs. If the value of your estate drops significantly, you may find there’s less to go round. This could cause disputes among your loved ones.
• Being clear about your bequests. It’s a good idea to explain in your Will why you are leaving a legacy to charity. It’s also important to include the correct charity name and number. Both of these measures can help prevent future disputes.
• The need to revisit your Will regularly. Inheritance Tax rules can change, meaning it’s important to check your Will regularly and make sure it still reflects your wishes. For example, the 2024 Autumn Budget announced a hugely significant change. From April 2027, inherited pensions will fall within a person’s estate for IHT purposes. If this will affect you, we strongly recommend you talk to one of our Inheritance Tax specialists.

Inheritance Tax and charities – what do I do next?

If you want to work out how much you should leave to charity to reduce your IHT rate, use this calculator.

However, we do recommend you get independent advice on both IHT and drawing up your Will. At THP, our experts are able to offer both. Get in touch today to learn more or to make an appointment.