How can giving to charity reduce an Inheritance Tax bill?

Inheritance Tax (IHT) is a tax on a person’s estate when they die. The estate will include any property that person owns, their savings and investments, and other assets they may have when they die.

The current rate of IHT payable is 40%. This is after the nil rate band and other exemptions and reliefs have been applied. A nil rate band is the amount of money that can be left before IHT becomes payable. The current nil rate band is £325,000 and has been this amount since 2009. In the 2022 Autumn Statement, Jeremey Hunt confirmed that this threshold would be frozen until at least 2028.

There are other exemptions and reliefs that may apply to your estate. These include the residence nil rate band, which relates to property (or the sale proceeds of property) passing to your direct descendants, and the transferable nil rate band, which relates to transferring over a nil rate band from a deceased spouse or civil partner.

Any assets that you pass to a surviving spouse or civil partner are exempt from IHT.

One way to reduce the IHT bill on your estate is to leave a gift to charity. Any amount left in your will to charity is exempt from IHT and will reduce the total amount of your estate on which IHT is payable. Further to this, if you leave 10% or more of your estate to a qualifying charity or charities, the rate of IHT reduces from 40% to 36%. This could have a significant bearing on your total IHT bill.

How to leave money to charity

When it comes to deciding on where you would like your money to go, you may already have a specific charity or charities in mind. If you do, it is possible to include the name(s) of the charities in your will. If, however, you are unsure on the exact charity, you can leave this decision to your trustees. If you choose to give your trustees this power, it is really important to give them some guidance in your lifetime so they can make an informed decision. It may be that your wishes change over time and so it is important you keep your trustees updated with this.

There are different ways you can leave a gift to charity in your will. This includes leaving a fixed sum of money, a specific asset (such as a property) or a percentage of your estate. In order to claim the 36% rate of IHT, the amount going to charity must equate to at least 10% of your overall baseline estate so it is important to factor this in when making your decision. The baseline of your estate is the value after the nil rate band and any other reliefs and exemptions have been applied.

Dealing with this after death

It is actually possible to take advantage of this relief even if a person didn’t include the gift to charity within their will. A deed of variation can be prepared after death to alter the way the estate is distributed and redirect a legacy or entitlement. Of course, the person(s) due to inherit must be in agreement with any such changes.

It is important to note that a deed of variation must be prepared within two years from the date of the death of the deceased person. There are also other relatively strict criteria that must be adhered to and everyone involved must understand the implications. Consent may be required from various people, including the executor(s) of the will.

If you have any questions about inheritance tax, please contact Will Norton.