The tax benefits of giving to charity

Money Advice Service

If you’re worried about the Inheritance Tax that might have to be paid when you die, giving away some of your money to charity – in your will – can reduce the bill. This guide explains how.

Cutting your Inheritance Tax bill

Visit GOV.UK to find more information on which part of your estate pays Inheritance Tax, calculators and relevant forms.

Leaving a part or your entire estate to charity can reduce, and in some situations, eliminate the Inheritance Tax liability.

If you leave something to charity in your will, then it won’t count towards the total taxable value of your estate.

This is called leaving a ‘charitable legacy’.

You can also cut the Inheritance Tax rate on the rest of your estate from 40% to 36%, if you leave at least 10% of your ‘net estate’ to a charity.

To illustrate how this would work, let’s say that when you died:

  • your net estate was worth £425,000
  • in your will, you left it all to your partner who lives with you
  • you have your full Inheritance Tax allowance (currently £325,000 for the 2019/20 tax year)
  • you weren’t married or in a civil partnership (so the spouse exemption is not available)
  • thus, the ‘net estate’ is £100,000 (i.e. £425,000 minus £325,000). And there is Inheritance Tax to pay on £100,000 at a rate of 40%
  • so, your estate’s would have to pay a tax bill of £40,000 (i.e. 40% of £100,000).

But if you wanted to reduce the tax bill by making a charitable gift:

  • you’d leave your partner £415,000, and
  • £10,000 to charity in your will (which is 10% of your ‘net value’ of £100,000)
  • the estate would then pay 36% on £90,000 worth of assets instead. This means that your estate would pay £32,400 in Inheritance Tax.

While this would mean your partner receives less when you die, in this example making a charitable legacy would shave off £7,600 from the Inheritance Tax bill.

This is worth considering if you’re keen to support a charity even after your death.

The rules on how to work out what you can give away to charity to secure the lower tax rate aren’t always as straightforward as our simple illustration above.

So, it’s a good idea to get the advice of a solicitor or accountant who specialises in estate planning.

Learn more about cutting your Inheritance Tax bill in Gifts and exemptions from Inheritance Tax.

This article is provided by the Money Advice Service.

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