Want to reduce Inheritance Tax? Donate to Charity

Want to reduce Inheritance Tax? Donate to Charity

Inheritance Tax Relief (IHT) on Charitable Donations is predicted to reach a record £900 million next year. In this blog, we explain why and how Wills online can help …

Whilst many mainstream media were still trying to make sense of social care funding plans yesterday, the Economic Times posted an interesting article on inheritance tax (IHT) relief. Apparently, IHT relief on charitable donations is predicted to reach a record £900 million in the next year. 

This statistic does not surprise us. We’ve raised £60 million in legacy pledges for UK charities since 20XX with our online Will template, and that’s been without even trying. 

  • So what is it that’s leading to the UK public becoming more generous when writing a Will?

    The Economic Time’s article suggests that the following socio-economic factors are contributing to this trend:

    • Rising life expectancy means dependents will frequently already have built up substantial savings by the time their parents die – freeing up elderly people to give more to charitable causes
    • Rising shares and property prices are increasing the values of estate, meaning individuals can often leave sizeable sums to both heirs as well as charities
    • Rising property prices are pushing more estates above the IHT thresh-hold and canny home owners are looking for ways to reduce their families’ tax burdens when they die
    • An increased awareness of the fact that a charitable donation will obtain relief from IHT in itself, and if it is equal to or exceeds 10% of the total estate, the rate of tax on the rest of the estate will be reduced by a factor of 10%

Looking at these last two points, let’s work through an example: 

The current thresh-hold for IHT is £325,000. This means you do not pay IHT on the first £325,000 in your estate.  So, if your estate is worth £450, 000 you will only pay on the amount above £325,000, so £125,000. You will pay 40% of this, so £50,000.

If you leave 10% of your estate to charity - £45,000, this amount is not included in the amount of money you will be taxed on, so, where as in the scenario above, you are taxed on £125,000, in this instance you will be taxed on £125,000 minus £45,000 (so on £80,000) and at the lower rate of 36% - meaning your family will only be asked to pay £28,800 IHT from your estate.

So by giving £45,000 to charity, you’ve cut your IHT bill from £50,000 to £28,800. Clearly, in this scenario – you are still giving away more than you would have been (£45,000 + £28,800 compared to £50,000) but you are choosing where your money is going to rather than it simply becoming absorbed by the state.

As hinted at earlier, here at Active Wills, our online will template UK makes it easy for you to include your charitable donations and for your executor to manage your affairs when you die, ensuring that your estate is fairly taxed. It also offers you the chance to have your Will read through by a Will writing expert for just £35, who will pick up if you are missing any IHT planning tricks. 

We also work with an increasing number of charities to enable them to provide such an easy to use online Will writing template (with affordable, professional proofing from our Will writing experts) to their members. In fact, we will soon be announcing a significant fundraising campaign that we will be running in association with one such UK charity, so watch this space…

The additional second tier discount rate introduced by HMRC for deaths after 5 April 2012 (reducing the Rate of IHT applied on the entire value of the estate from 40% to 36% if the charitable legacy is equal to or worth more than 10% of the estate)