Relief from Inheritance Tax: How Leaving Gifts to Charity in Your Will Could Save Your Family Money

Learn how charitable gifts in your will can reduce inheritance tax, when the 36% reduced IHT rate applies, and why professional estate planning advice is essential.

Do charities need your help?

When making a will, many people think about leaving a gift to charity, especially if they have supported a particular cause during their lifetime. A charitable legacy can be a meaningful way to provide additional support from money that, as the saying goes, “you can’t take with you”.

Many charities rely heavily on gifts in wills to fund their work, and larger charities often have dedicated legacy teams to promote and administer these gifts.

However, most people’s priority when drafting their will is to provide for their family and loved ones. The key question is therefore: can charitable giving support both your chosen charity and your family?

How charitable gifts can reduce inheritance tax

Recent HMRC data shows a significant rise in inheritance tax relief claimed by estates because of charitable gifts made in wills. This is not surprising, as more estates fall within the inheritance tax net due to increased property prices and frozen inheritance tax thresholds. Charitable giving is increasingly being considered as part of inheritance tax planning.

Gifts to qualifying charities in a will are exempt from inheritance tax. In addition, if enough of the estate is left to charity, the inheritance tax rate on the non-exempt part of the estate may be reduced from 40% to 36%. Broadly, the charitable gift needs to be at least 10% of the net estate, calculated after deducting debts, reliefs and exemptions.

The exact calculation can be technical, so it is important to check the figures to confirm whether the reduced rate will apply.

Could leaving money to charity benefit your family?

The reduced rate of inheritance tax is intended to encourage people to leave a larger gift to charity. In some estates, the lower tax rate can mean that the family receives more overall than they would have done without the charitable gift. In other cases, the charity receives a significantly larger sum while the amount passing to the family reduces only slightly, with HMRC receiving less. It is not guaranteed that your family will receive more from your estate due to the reduced IHT rate, so advisers should always calculate the position carefully before recommending this approach.

What I personally see most often are scenarios where the gifts to charity increase dramatically, while families pay a little more (relatively) and HMRC receives significantly less in tax. Where a client has already been considering charitable gifting, this would always be something I would highlight to them as an option.

How to draft a will to qualify for the 36% IHT rate

A common way to qualify for the 36% inheritance tax rate is to include a carefully drafted clause in the will. This clause can leave a charitable gift equal to the amount needed to meet the reduced-rate test. The gift can then increase or decrease in line with the value of the estate, helping to ensure the relevant criteria are met.

Why professional advice matters

Drafting charitable gifts for inheritance tax planning is technical. The will should identify the charity correctly and use wording that reflects the relevant inheritance tax legislation. Professional advice can help confirm whether the reduced rate is likely to benefit your family and ensure the will is drafted so the gift takes effect as intended.

Speak to a solicitor about charitable gifts in your will

If you are considering leaving money to charity in your will, it is worth taking tailored legal advice before deciding on the amount or wording of the gift. A solicitor can help you balance your charitable wishes with your family’s inheritance and make sure your estate planning is tax-efficient.

Leaving a gift to charity in your will does not have to mean choosing between supporting a good cause and providing for your family. With careful planning, you may be able to achieve both while reducing the inheritance tax payable.

If you are considering a charitable gift in your will, call us on 0333 344 6302 to discuss how we can help.