Cut Your Tax Bill With Charitable Giving

Charities across the country rely on charitable legacies and bequests. The generosity of testators (that is, individuals writing wills) helps to ensure that many causes survive.

But charitable giving also has potential benefits for the donor and their friends and family. As well as helping charities to continue their vital work, charitable giving is an important means by which individuals can lower their tax bill – meaning that their chosen causes, rather than the government, gets the use of their estate when they die.

Charitable giving is an efficient way of reducing your tax bill during your life, through the use of the Gift Aid system. But, as we explain here, it is also a potentially great way of reducing your ultimate Inheritance Tax liability – and helping to ensure that your money is used in the way you intend, both during and after your life.

What taxes would I have to pay?

For many people, one of the biggest concerns when they are writing their will is the impact of Inheritance Tax (IHT). This much-hated tax was originally designed to break up large estates, but it has failed to keep up with property price increases and, as a result, now affects many thousands of ordinary families.

If the value of your estate exceeds £325,000 (for the 2011-12 tax year), IHT will be charged at a rate of 40 per cent on assets above that threshold. It is also charged on gifts made less than seven years before your death.

As property prices have risen, IHT has become a reality for more and more people. Indeed, it is now not uncommon for the value of a home on its own to push an estate over the threshold. As a result, many more people are now interested in ways to reduce their Inheritance Tax liability.

How does charity come into it?

There is a range of exemptions related to Inheritance Tax. These exemptions mean that it is sometimes possible for IHT not to be levied, or for it to be levied on a smaller proportion of an estate. The most common of these is the exemption for transfers between spouses or civil partners – but crucially, exemptions are also available for charitable giving.

If you leave money to a qualifying charity in your will, or if you give money to that organisation within seven years of your death, it will not be counted as part of your estate for Inheritance Tax purposes. This is a popular means by which IHT bills can be reduced or avoided – while making sure that a testator’s preferred causes or charities, rather than the taxman, benefit from their estate.

How do I do it?

First it is important to understand what is meant by ‘qualifying charity’. Exemptions are only available to organisations that are registered with HMRC as charities for tax purposes. These organisations may be either charities or Community Amateur Sports Clubs (CASCs).

Leaving the money is a relatively simple procedure. You need to nominate the charity in your will, and detail the amount that you wish to leave – either as a fixed sum or as a percentage of your estate. Try to be as precise as possible when nominating the charity. Leave as many identifying details as you can, particularly if the charity is not well known.

There is more information about nominating beneficiaries elsewhere on this site. You may also want to speak to a solicitor or other legal professional for help with this.

Is there anything to remember?

It is important to understand the different ways in which you might leave money. As mentioned above, the choice is between leaving a portion of your estate or a fixed sum. The fixed sum option is known as a Pecuniary Legacy, while the portion (after all other obligations have been met) is referred to as a Residuary Legacy. You should think carefully about which option you choose. Many people prefer to leave a Pecuniary Legacy to charities, as this will help to ensure that their family and other dependants are looked after.

It is also worth remembering that you don’t need to be hugely wealthy in order to leave a worthwhile legacy. Charities don’t just want huge donations – instead, many survive on relatively small bequests. Don’t be put off giving if you can’t give a huge amount.

Finally, as with any kind of tax planning or any element of the will writing process, you should always seek independent professional advice before proceeding. Free advice is available from your local Citizens Advice Bureau.