How to give wealth away tax-efficiently
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
There are many benefits to giving money and assets to charity. Not only is there the sense of fulfilment which often comes with generosity, but there can also be important tax benefits. Here, our financial advisers in Grantham at Castlegate offer some thoughts on how an individual could mitigate their tax bill through acts of charity – particularly with reference to inheritance tax (IHT). We hope you find this guide helpful. If you would like to discuss any of these matters or discuss your own financial plan with us please get in touch to arrange a no-obligation financial consultation, at our expense:
Cutting IHT with charitable giving
In 2020-21, the standard rate for IHT is 40% on the value of an estate over £325,000 when the owner dies. There are certain caveats which allow you to pass on more to your beneficiaries free of IHT, of course. The additional nil rate band (ANRB), for instance, enables you to raise your threshold by £175,000 in 2020-21 provided you pass your family home on to your direct descendants (i.e. children/grandchildren).
Yet leaving some – or all – of your estate to one or more registered charities can also be a good way to mitigate future death taxes. Here, provided you leave at least 10% of your “net estate” to charity, then your IHT rate can be reduced from 40% to 36%. Here’s an example of how this could work in practice:
● Suppose you owned £500,000 at the time of your death (e.g. property, cash etc).
● You left all of this to your unmarried partner of 20 years, in your will.
● You have not used any of your £325,000 IHT allowance in the 2020-21 tax year.
● The “net estate”, in this case, is £175,000 (i.e. £500,000 – £325,000).
● As such, there would be 40% IHT to pay on the value of this part of your estate- amounting to £70,000.
However, suppose instead that you wanted to include a charitable gift in your will. In which case, the scenario could play out like this:
● Here, you leave 10% of your estate’s “net value” to a charity in your will, which amounts to £17,500.
● You leave the remaining £482,500 to your unmarried partner in your will.
● This leaves £157,000 liable to IHT.
● The estate would, in this case, likely then need to pay 36% IHT on this amount, instead of 40%. As such, the final IHT bill in this scenario would be £56,520 instead of the £70,000 in scenario 1 above – a difference of £13,480.
Tax relief on charitable donations
This information might inspire some ideas for how you might use charitable giving in your estate plan. Yet what about the here and now? How might you give away wealth tax-effectively at this present time? Here, you have a number of options which you could discuss with your financial adviser:
- Gift Aid. This is perhaps the most well-known (if misunderstood) ways to make donations in a tax-efficient manner here in the UK. Here, the government will add a 25p “top-up” to every £1 you donate – without any additional cost to you. The main requirements here are that you fill out the relevant form from the charity, and that you are a UK taxpayer.
- Salary/pension-based donations. Another idea to consider is to give a regular amount straight from your wage, assuming your employer runs a Payroll Giving scheme. The great benefit of this approach is that it allows you to get tax relief on the donation, according to your rate of income tax. For a Higher Rate taxpayer, for instance, a £1 donation will “cost” you only 60p.
- Donating assets. It could be that you have land, shares or property which you may be thinking about giving away. The great news is that in 2020-21 you are not obligated to pay taxes on these types of assets if you give them away to a charity. It will be a good idea to seek professional financial advice, however, if you are considering this to make sure you complete the relevant steps and avoid any mistakes in the process. They will be able to help you with the Income Tax relief, for instance, which involves deducting the value of the donation from your total taxable income (in the tax year that the donation was made). You also do not need to pay capital gains tax on property, land or shares which you give away to charity.
Conclusion & invitation
As you can see, there are many ways to engage in philanthropy which do not require paying more in taxes. Indeed, there are some powerful tools available via IHT, Gift Aid and similar approaches to help increase the value of your donations.
If you are interested in discussing your own financial plan or tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: