Those looking to reduce the potential Inheritance Tax bill facing their families and also to leave a significant gift to charity should be aware that the latter can serve the former very powerfully: whereas a rate of 40% applies to the chargeable assets remaining after all exemptions and reliefs have been applied ordinarily, this is reduced to 36% where 10% or more passes to charity.
Experts say that the tipping point is you planning to leave 4% of your anticipated estate to charity; at that point the relief effectively increases the value of the gift to the charity and does not cost the beneficiaries of the estate anything in real terms
If you were already planning to leave money to charity, this could be a very attractive option. Experts say that the tipping point is you planning to leave 4% of your anticipated estate to charity; at that point the relief effectively increases the value of the gift to the charity and does not cost the beneficiaries of the estate anything in real terms. Doubtlessly, many family members will be glad to hear that charities can benefit cost free in this way.
As with all things related to IHT, those considering this option need to take expert advice on implementing it correctly – particularly concerning the wording of wills. A common error made when making this kind of gift to charity is that the testator does not include express provisions in their will determining whether IHT should be deducted before or after the gifts were calculated. This is crucial.
It is already the case that many families have to take out a loan to pay outstanding IHT before they can proceed to administer an estate, since HMRC needs to be paid first
Because charities receive gifts free of IHT and the courts see it as unfair for them to have to pay any of this tax it will otherwise be loved ones who bear the burden of any IHT due. Testators need to be clear that gifts are to be assigned once IHT has already been deducted if they wish to spare their beneficiaries the stress of a large bill. It is already the case that many families have to take out a loan to pay outstanding IHT before they can proceed to administer an estate, since HMRC needs to be paid first.
Leaving 10% or more of your estate to charity and getting a reduced IHT of 36% in return might represent a good deal for those who were already planning to leave a significant proportion of their estate to charity, and it might prompt interest in this kind of strategy for the first time too.
There are many complexities in this area, however, and you would be well advised to take professional advice on your will and estate planning strategy – and to set expectations among your beneficiaries as soon as is feasible.
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