Tax incentives make bequeathing money to charity in your Will a win-win

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The UK is becoming more generous in its charitable giving, Nicola Waldman explains why bequeathing money to charity in your will can actually increase what you leave behind.

Last year in the UK, we donated £9.7 billion to charity and we appear to be getting more generous. Money left in Wills makes up a quarter of everything donated to charities, more than £2.24bn annually. 

Cancer Research UK is the top beneficiary from legacies (money left in wills), receiving around £170m. The RNLI comes second, with £112.9m, or two-thirds of its fundraised income from legacies, followed by the RSPCA, which receives £63.7m, more than half (59 per cent) of its total fundraised income.

“Without wanting to quash the sentiment that we in the UK are a generous bunch, inheritance tax (IHT) advantages introduced in 2012 have likely encouraged charitable bequests,” Nicola admits. 

“If you leave 10 per cent or more of your estate to a UK registered charity, not only is the amount you give to charity free of IHT, but the IHT on the rest of your estate is 36 per cent instead of 40 per cent.” 

By way of example, say John Smith has an estate of £500,000 and decides to leave it all to his family. After deduction of his nil rate band (£325,000), his estate will pay IHT of £70,000. Had John left 10 per cent of his estate to a UK registered charity, the tax bill would have been £56,700, saving £13,300. 

Nicola says, “The other point to bear in mind is for those who want to give to charity anyway, the ‘cost’ to non-charity beneficiaries, e.g. family, of a 10 per cent legacy is the same as the cost of a 4 per cent legacy, meaning it makes perfect sense to leave more to charity.

“In other words, say someone has an estate of £950,000 and intends to leave 4 per cent to a UK charity and the rest to his niece and nephew. As the charity gift is less than 10 per cent, the original 40 per cent rate of IHT is still payable on the rest of his estate. This means the charity gets £25,000, the IHT is £240,000 and the children get £685,000 between them.

Had they been more generous and given 10 per cent to the charity, the 36 per cent rate of IHT would apply. The charity would now get £62,500, the IHT would be £202,500 and the children would still get £685,000 - no difference to the children, the charity gets more and HMRC pays the difference!  

In addition, it often makes sense to make a bigger charitable gift from an estate you’ve inherited. A gift of between 4 and 10 per cent of that estate actually costs the non-charity beneficiaries, e.g. you and your siblings, more than a gift of 10 per cent. This example is from an actual case:

Two brothers wanted to give money to the RSPC from their mother’s estate. She had left everything to them in her Will. They told their lawyer they wanted to do a deed of variation to the Will, leaving what amounted to 9 per cent of the estate to charity and keeping the balance. 

In the estate of £1,200,000, this would have meant a gift to charity of £78,750 and a tax bill of £318,500, leaving the brothers with £802,750. Instead, their solicitor advised them to leave 10 per cent of the estate to the RSPC. It then received £87,500, the tax bill was reduced to £283,500 and the brothers received £829,000 – a net saving to them of £26,250 achieved by leaving a bit more to charity.”

The rare moral of the story is clearly, in certain cases, the more you give, the more you save!

Tags: Wills legacy bequeth

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