The tax benefits of giving to charity

If you’re worried about the Inheritance Tax that might have to be paid when you die, giving away some of your money to charity – either now or in your will – can reduce the bill. This guide explains how.

• Cutting your Inheritance Tax bill when you don’t own property
• Giving to charity while alive and tax relief
• How to leave something to charity in your will

Cutting your Inheritance Tax bill

Leaving a part or your entire estate to charity can reduce, and in some situations, eliminate the Inheritance Tax liability.

If you leave something to charity in your will, then it won’t count towards the total taxable value of your estate.

This is called leaving a ‘charitable legacy’.

You can also cut the Inheritance Tax rate on the rest of your estate from 40% to 36%, if you leave at least 10% of your ‘net estate’ to a charity.

To illustrate how this would work, let’s say that when you died:

• your net estate was worth £425,000
• in your will, you left it all to your partner who lives with you
• you have your full Inheritance Tax allowance (currently £325,000 for the 2018/19 tax year)
• you weren’t married or in a civil partnership (the spouse exemption is not available if you are not married)
• thus, the ‘net estate’ is £100,000 (i.e. £425,000 minus £325,000). And there is Inheritance Tax to pay on £100,000 at a rate of 40%
• so, your estate’s would have to pay a tax bill of £40,000 (i.e. 40% of £100,000).

But if you wanted to reduce the tax bill by making a charitable gift:

• you’d leave your partner £415,000, and
• £10,000 to charity in your will (which is 10% of your ‘net value’ of £100,000)
• the estate would then pay 36% on £90,000 worth of assets instead. This means that your estate would pay £32,400 in Inheritance Tax.

While this would mean your partner receives less when you die, in this example making a charitable legacy would shave off £7,600 from the Inheritance Tax bill.

This is worth considering if you’re keen to support a charity even after your death.

The rules on how to work out what you can give away to charity to secure the lower tax rate aren’t always as straightforward as our simple illustration above.

So, it’s a good idea to get the advice of a solicitor or accountant who specialises in estate planning.

Giving to charity while alive and tax relief

There’s nothing to stop you from giving to charity right away.

You can make a cash donation or give them anything you own and it won’t be counted as part of your estate when you die.

This could cut or even eliminate any Inheritance Tax there is to pay upon death.

You can also benefit from some relief from certain taxes such as Income Tax, when you donate to a charity while you’re still alive.

How to leave something to charity in your will

If you want to give a charity something in your will, you can leave it either as:

• a fixed amount of money, known as a ‘pecuniary legacy’
• a share of what’s left of your estate once all costs and other legacies are paid out, known as a ‘residuary legacy’.

As your will is a legally binding document, and the subject of charitable legacies can be complex, it’s sensible to seek professional help when making a legacy in your will.

What to include in your will

Make sure that you, or the person writing your will, includes all the information your executor will need to understand what you want to happen.

This should include:

• the name of the charity, spelled correctly (so there are no arguments)
• the registered charity number of the charity and its registered address, which will be on the charity’s website or on a central register.
• a receipt clause so the charity’s trustee or treasurer can accept the ley.
• a merger clause so if the charity has merged or ceases to exist, your executor can pay the legacy to the new charity or a charity with similar charitable values.

Giving to a specific charity

To find details of a charity you wish to support, search:

• England and Wales - Charities Commission’s register of charities
• Northern Ireland – the Charity Commission for Northern Ireland
• Scotland - Scottish Charity Regulator’s charity register

If you want a legacy to go to a local branch of the charity, rather than into a central pot, check with the charity first if this is possible.

Some branches are not legally able to accept gifts themselves.

Some charities will help you to write a will for free if you include a legacy for them in it. Ask your favoured charity whether they offer a free will writing service.

This article is provided by the Money Advice Service.