Inheritance tax (IHT) is charged on the estate of someone who has died and is passing on their assets, so long as their estate is valued at more than £325,000. Where IHT is due, it is charged at 40 percent.
However, if a person leaves part of their estate to a charity it can reduce their bills.
Known as a “charitable legacy”, it can cut the IHT charged on the remainder of the estate to 36 percent if at least 10 percent of the net estate is left to charity.
On top of the tax benefits, Sue Wakefield, a Director at Zedra, implored savers to support charities who have been hit hard by coronavirus: “There are many reasons why you should consider charitable giving now more than ever.
“Whilst your focus may be on the philanthropic aspects of helping others, the tax treatment of such donations is worth consideration.
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“It is sadly true that many charities are victims of the current global pandemic and face years of needing increased support to regain lost revenue.
“This year, there is an estimated £10.1billion funding shortfall within the charitable sector.
“Against this backdrop, it is uplifting to read that people are increasingly making charitable gifts by Will – particularly high net worth individuals (HNWIs) – with the most recently available data from HM Revenue & Customs (HMRC) indicating that gifts of over £1million to charities on death have increased by 31 percent.
“”While gifts in Wills are extremely valuable to charities and account for around a third of their voluntary income, charitable gifting in lifetime may be more beneficial personally to HNWIs and will certainly provide much relied upon revenue to charities when they most need it.”
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Sue went on to cover the tax relief benefits associated with charitable donations: “Charitable gifting during lifetime is extremely tax efficient with tax reliefs such as Gift Aid providing the providing the opportunity in principle to claim back the difference between the basic rate and higher tax rates on charitable donations.
“This, of course, is additional to the increased 25 percent value of the donation to the charity.
“Gifts to charities are also exempt from inheritance tax and capital gains tax, assets being gifted are treated as being disposed of at a nil value.
“We should also not forget the social and moral benefits to gifting; quite simply it feels good to help others and there are reports of less stress and anxiety and even improved life expectancy for those who regularly support charitable organisations.
Where IHT is due, it must be paid by the end of the sixth month after the person’s death.
If it is not paid within this timeframe, HMRC will begin to charge interest.
On top of leaving money and assets to charity, the Money Advice Service noted the following can reduce IHT bills:
- Putting assets into a trust for heirs
- Leaving an estate to a spouse or civil partner
- Paying into a pension instead of a savings account
- Regularly giving away up to £3,000 a year in gifts