Gifts, Charities & Your Will
This content is for information purposes only. It should not be taken as financial advice or investment advice. To receive bespoke, regulated financial advice regarding your affairs and personal goals, please consult an independent financial adviser (IFA) either here in Grantham or in your local area.
If you are in the process of wondering how charitable giving might feature in your estate planning, then this article is for you. Gifting capital to a meaningful cause is not only a positive way to leave a legacy when you eventually pass; it also has the potential to reduce your exposure to inheritance tax (IHT).
You do not need to wait until your final day to gift money to charity from your estate in a tax-efficient manner. Everyone has the option to use Gift Aid, for instance, which allows charities to claim an extra 25p from the government for every £1 they receive in donations.
Giving money to charity is something you can choose to do throughout your life. Perhaps you even decide to commit to one or two particular organisations over many decades, such as Save the Children or Cancer Research UK.
One benefit you might not be aware of is how Gift Aid relates to the Higher Rate income tax bracket. For instance, imagine you give £200 to a charity and they claim Gift Aid of £50, totalling £250 to the organisation. In this situation, you can claim back some of the money. In this situation, you could potentially claim back £50 (i.e. £250 x 0.20).
Charitable Giving & Your Will
If you want to leave money to a particular charitable cause then it’s a good idea to check, first of all, whether you can do so. Some organisations cannot accept legacies, and it would be a shame to assume your donation will one day go through, only to see it hit a brick wall.
There are several different ways that you can gift money to charity from your estate. One of the most popular approaches is simply to leave a single, fixed lump sum for a charity in your will. Alternatively, you could donate shares or property.
Regardless of the exact approach you take to donating, it’s generally a good idea to specify the charity explicitly in your will. Make sure you mention the charity’s registered number, for instance, as well as its official address. All of this can help to avoid confusion when the time comes for your executors to start sorting through your estate as they refer to your will.
Charitable Giving & IHT
As mentioned earlier, giving money to charity from your estate can result in a reduction in the amount of IHT you might otherwise have paid. In 2019-20, the Nil Rate Band stands at £325,000 for each person when it comes to IHT. Anything in your estate valued over this amount is likely to be taxed at 40% (unless you raise your threshold by combining allowances, using your Additional Nil Rate Band or other financial planning approaches).
However, if you decide to leave at least 10% of your estate to one or more charities, then your 40% IHT rate can be reduced to 36%. In many cases this can result in huge savings on an IHT bill, or even eliminate the bill; although you should always consult an independent financial adviser before making big decisions like this, regarding your estate.
Also, gifts to charities are given special status under the UK’s inheritance tax rules. Most gifts have an annual limit on their value to be exempt from IHT. For instance, your Annual Exemption allows you to give away up to £3,000 per year without facing tax. You can also make as many individual £250 donations as you like to different people, IHT-free, within a given tax year. Donations to charities, however, are completely free of IHT regardless of the charity or the amount you have given.
Gifting in Life vs. Gifting in Death
At this point, many people ask which is ultimately better: to give money to charity throughout your life, or to lump all of your donations together into your will? This is sometimes known as the “Lifetime gifts versus legacies” debate, and it’s an important one.
As in most areas of financial planning, the answer is, of course: it depends! For one thing, it depends on your wealth and financial situation at different stages in your life. It also depends partly on what your ultimate aim is. Are you primarily looking to give as much away to charity as possible, or is your main motivation to use charitable giving as a means to reduce your IHT bill?
On the latter question, the answer is likely to be somewhere in the middle; although this isn’t to say that this is the approach which you should take. Remember, your own financial circumstances and goals throughout your life are important here too. For instance, you might be able to make your donations go much further throughout your career, perhaps through your employee benefits (e.g. employers allowing you to donate directly from your wage, before tax) as well as by leveraging the power of Gift Aid. After death, Gift Aid no longer applies to your charitable giving.
Giving to charity can be a fulfilling way to put some of your capital towards good causes, whilst also potentially saving money on your IHT bill. It is important to ensure that you attain professional, independent financial advice, however, if you are considering donating significant sums in this way.
If you are interested in finding out more, please get in touch today to arrange a free consultation with a member of our Castlegate team, at our expense.
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