Insights
Insights 17.10.21 Author: Michaela Lamb

Leaving a Charitable Legacy

Insights 17.10.2021 Author: Michaela Lamb

Many people make monthly or annual gifts to charity during their lifetime, and in doing so are able to take advantage of gift aid rules which help both the charity and them personally, with HMRC providing a generous benefit to both parties. However, far fewer people make a charitable legacy from their Estate.

Like making donations during one’s lifetime, where gifts are made on your death, HMRC provide generous benefits.

For example, if you have already made a charitable legacy in your Will, you may find that by increasing the amount you give to the charity, this could actually leave your loved ones with a greater after-tax legacy than would have been the case without that gift.  You have therefore improved tax efficiency for your family and provided a greater benefit to your favourite charity, with HMRC bearing the expense of doing that.

Alternatively, if you are charitably minded but have not yet included a charitable legacy in your Will, you may find that the cost to your estate to do this is less than you think because of the reliefs available.

How does it work?

There are two main reliefs on charitable legacies:

  1. Gifts to UK charities always pass IHT Free
  2. Estates that make charitable legacies worth at least 10% of the taxable value of your estate (after various exemptions) are taxable at a reduced rate of 36% rather than the usual 40%

Taking a basic example:

For someone who has an estate worth £500,000 who is entitled to a single nil rate band, the minimum charitable donation required to qualify for the lower tax rate would be £17,500 (i.e. 10% of the post nil rate band value of the Estate.

Before taking into account charitable legacies, the estate would owe tax of £70,000, leaving the beneficiaries with £430,000 net of tax.

If a charitable gift of £17,500 was made, the tax reduces to £56,700.  The charity gets £17,500, and the beneficiaries receive £425,800 net. Effectively HMRC has paid £13,300 of the cost of the charitable legacy, and this has cost the other beneficiaries just £4,200 compared to what they would otherwise have received.

If the Will already included a charitable legacy of £10,000 for example, the other beneficiaries would be left with £424,000 after tax. However, by increasing the legacy to the charity by a further £7,500, the other beneficiaries are in the same position as above – i.e. they are actually £1,800 better off!

So, depending on the value of the estate and the amount gifted, a charitable legacy may in fact be even more tax efficient than one during lifetime, especially if you are a basic rate taxpayer when lifetime gifts are made.  Even so, this should not put you off making regular lifetime gifts if you already do that– charities rely on both kinds of gifts to survive and carry on their good works.

Next Steps

Because the rules are generous, there are a number of complexities involved and professional advice should always be sought to determine what level of gifts should be made, and how best to phrase the gift in your Will to ensure your family’s needs are still taken care of.

If you would like to discuss including charitable legacies in your Will as part of your Estate plan, please get in touch with Michaela Lamb.