If you are planning to leave an inheritance to your loved ones when you die, you’re probably already familiar with Inheritance Tax (IHT). It could severely limit the amount your family receives. This is why good estate planning is so important.
Your beneficiaries could face a tax liability of 40% on the value of your estate that exceeds the current threshold. For the 2021/22 tax year this threshold – known as the “nil-rate band” – is £325,000.
You also have a “residence nil-rate band” of £175,000. This comes into play if you leave your home to your children or grandchildren.
Both of these allowances are currently frozen until at least 2026.
There are several other ways to lower a potential IHT liability. You could make use of certain HMRC exemptions or use gifts to charity to lower both the value of your estate and – potentially – the rate of tax you pay.
Keep reading to find out how.
Charitable giving is on the rise
Back in 2020, while coronavirus lockdowns and the cancellation of fundraising events including the London Marathon hit charitable donations hard, there was a sharp rise in money being left to charity in wills.
The Independent confirmed that legacy-giving between February and April 2020 increased from £3.5 million to £35 million, a massive tenfold increase.
According to UK Fundraising, legacy income over the next 10 years is expected to reach £43 billion, up £3 billion from previous forecasts.
It is largely down to the unprecedented wealth transfer that is due to take place over the next few decades, as baby boomers look to pass on their estates.
These charitable legacies are hugely important to charities. The British Heart Foundation recently confirmed that half of its total voluntary income comes from legacy giving in wills. Cancer Research UK, meanwhile, states that gifts in wills fund a third of its life-saving research, making an enormous difference now and for future generations.
Make sure you have a will in place and once you do, be sure to keep it up to date. It is the best way to ensure your wishes are known while reducing stress for those you leave behind and allowing you to tax-efficiently manage your estate.
Gifting 10% of your estate to charity lowers your rate of IHT to 36%
You can make tax-free gifts to charity during your lifetime or in your will. Charitable giving can make you feel good while supporting a cause you care about. It has financial benefits too.
Gifts lower the value of your estate for IHT purposes, thereby lowering the liability you leave behind. Plus, donate 10% of the net value of your estate to charity and the rate of IHT payable falls from 40% to 36%.
There are a few different ways to leave a charitable legacy in your will. These include:
- A pecuniary legacy – where you leave a specific amount to a charity of your choice
- A residual legacy – where you make all bequests and cover fees and then leave whatever remains to charity
- A contingent legacy – where you plan to give money to charity only if another event doesn’t occur. For example, the money intended for one of your beneficiaries might go to charity if that beneficiary pre-deceases you
- A specific legacy – where you specify a certain item that is to be given to charity on your death.
Leaving a charitable legacy can make a real difference to the charities themselves, and to those the charity helps.
There are plenty of ways to gift to charity during your lifetime
You don’t have to give only on death. You can give to charity during your lifetime too.
You can donate from your earnings
If your employer operates a “Give as you Earn” scheme, you can make hassle-free donations from your pre-tax earnings.
You’ll even receive tax relief based on the rate of tax you pay.
You can donate through purchases
By completing a Gift Aid form when you donate, you allow the charity to claim back the basic rate of tax you paid. For every £1 you donate, your chosen charity receives £1.25.
You can donate your time
The pandemic saw a huge rise in remote and online volunteering.
You might find you want to donate your time or expertise to a charity this festive period. The National Council for Voluntary Organisations (NCVO) can help you to find a volunteer centre near you.
Get in touch
If you’d like advice on any aspect of your estate planning, including the possible tax benefits of charitable giving, please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779.
Please don’t hesitate to share this article with your friends and family, or anyone else who you think might benefit.
Please note:
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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