Increasing the amount left to charity in your Will could save inheritance tax while increasing the amount passing to your other beneficiaries, with HMRC picking up the difference.
In an attempt to promote greater philanthropy, the Government introduced a reduced 36% rate of inheritance tax for individuals who leave at least 10 per cent of their net estate to a qualifying charity; a reduction of 10 per cent of the usual 40 per cent tax rate.
For many, 10 per cent may seem an offputtingly large portion of their estate. However, the 10 per cent is calculated with reference to the “net estate” - after deduction of any reliefs, exemptions and the available nil rate band (currently set at £325,000 per person), including any transferable nil rate band. The required 10 per cent legacy can therefore often be significantly less than 10 per cent of the value of the deceased’s assets.
A further key feature of this scheme is the "4 per cent tipping point". This applies where someone has already made reasonable provision for charity in their Will but where the amount of the charitable legacy is less than the critical 10 per cent point. Provided the charitable gift is already more than 4 per cent of their net estate, varying the Will to increase the charitable legacy to the required 10 per cent could have a significant impact on the estate's overall inheritance tax liability, so that all the beneficiaries - both charitable and non-charitable - are better off.
The point is best illustrated by a comparative example with an estate valued at £1 million:
| Estate value |
£1 million |
£1 million |
| Less available nil rate band |
(£325,000) |
(£325,000) |
| Net estate for 10% test |
(£675,000) |
(£675,000 |
| Less charitable legacy |
(£45,000) |
(£67,500) |
| Taxable estate |
(£630,000) |
(£607,500) |
| Inheritance tax due |
@40% = £252,000 |
@36% = £218,000 |
| Distributable amount (after tax and charitable legacy) |
£703,000 |
£713,000 |
Provided the amount left to charity is already 4 per cent or more, an increase to 10 per cent will not result in a loss to the non-charitable beneficiaries as the cost of the increased legacy to charity is borne by HMRC.
While it is clear to see the appeal to people who have already included a sizeable legacy to charity in their Wills, it may be worth considering for those who wish to save tax but haven't previously considered leaving this proportion to charity.
Even if someone doesn't get round to including such a legacy in their Will, or if changing asset values mean that the charitable legacy falls short of the 10 per cent threshold, it is possible to secure the reduced rate even after a person has died, provided: the death occurred after 6 April 2012; the beneficiaries agree; and a deed of variation is entered into within two years of the date of death to increase the charitable donation and secure the reduced rate.
Of course leaving a legacy to charity isn't for everyone and leaving money to charity means less is available for the non-charitable beneficiaries, but for those who are already feeling philanthropic, a little time spent analysing how much is left to charity could result in a tax saving and increase the amount passing to your beneficiaries.
Our content explained
Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.