Whether done during life, or on death, gifting money or other assets to charity is very common and commendable. This article looks at the position in more detail. Please note that the reference to charity means any UK registered charity only.
Gifting on death
Leaving a gift to charity in your Will is fairly straight forward. Once the Will is drafted, you don’t need to do anything else as your executors will deal with the gift following your death.
How the gift is designed is entirely your choice. If could be a specific amount of money (eg £10,000), it could be a specific asset (e.g. my house) or it could be a share of your estate (eg 10%). Where it is the latter, it will largely be up to your executors to determine what assets are to be transferred to the charity in order to fund such a legacy – but often it will comprise of cash.
One benefit to incorporating such a gift in your Will, rather than making it during your lifetime, is that you are not creating any future uncertainty for yourself. Once you have made a gift during your lifetime, you cannot take it back. For example, are you confident that if you make a lifetime gift of £50,000 you definitely won’t need that money in the future, perhaps, for care home fees or the repair of your property due to an unforeseen event?
From a tax perspective, leaving a gift to charity in your Will is very efficient for inheritance tax (IHT) purposes. The value of a person’s estate when they die, after deducting available reliefs, exemptions, and nil-rate bands, is liable to IHT at 40%. However, one such exemption is the charity exemption where any value passing to charity on death is exempt from IHT.
Charity exemption is therefore unlimited. It doesn’t matter how big or small the gift is but, of course, the gift cannot exceed the value of your estate.
It is not just the existence of the charity exemption which is why such gifts are IHT efficient. There is a potential second reason. Where a person leaves at least 10% of their “baseline amount” to charity, the 40% IHT, which they are liable for on the value of their estate not already covered by available reliefs, exemptions, and nil-rate bands, is reduced down to 36%.
The “baseline amount” is not always straight forward to understand or calculate. It can vary between persons. As such, professional advice should be sought. However, as a very broad, basic description, the baseline amount can be thought of as being the value of person’s estate after deducting available reliefs, exemptions, and nil-rate bands, but not deducting the charitable exemption itself.
Where a Will already contains a gift to charity (or multiple gifts) which equates to more than 4% of the baseline amount but less than 10%, it will be IHT efficient to increase the gift up to the 10% limit. On first glance, you might think that this would leave the other beneficiaries of your Will worse off because by increasing the size of the charity gift, you are decreasing the size of their gift. However, due to the IHT reduction from 40% to 36%, it is actually the case that all beneficiaries are better off. It is only HMRC who suffer loss. This is illustrated in the table below.
|% Left to charity||IHT rate (% to HMRC)||% Left to other chargeable beneficiaries|
|3%||40% (on 97%)||58.2%|
|4%||40% (on 96%)||57.6%|
|5%||40% (on 95%)||57.0%|
|6%||40% (on 94%)||56.4%|
|7%||40% (on 93%)||55.8%|
|8%||40% (on 92%)||55.2%|
|9%||40% (on 91%)||54.6%|
|10%||36% (on 90%)||57.6%|
|11%||36% (on 89%)||57.0%|
The non-charitable beneficiaries are in the same position regardless of whether 4% or 10% is gifted. Anything in between though and they are worse off. Therefore, an increase from 7% to 10% (for example), benefits the non-charitable beneficiaries in addition to the charity (or charities).
If you ultimately want to take advantage of the lower 36% rate (assuming that a share of your estate will ultimately be liable to IHT), putting a fixed cash sum or specific asset in your Will might mean that you fail to meet the 10% requirement at the time you die. The value of your estate, when you die, could be very different to its value when you draft your Will. Therefore, there are two main options.
Firstly, you could design your Will in such a way that you leave a share of your estate to charity, and that the size of such a share must at least equal whatever value is required in order to meet the 10% requirement. Alternatively, your Will could be retrospectively varied after your death, by one or more of your non-charitable beneficiaries. This second option is not as attractive as you will have no control over the outcome. Plus, it needs to happen within two years of your death. Furthermore, there is always the uncertainty that the option to vary a Will following death may not be available.
Gifting during life
Making a gift during your life allows the charity to benefit from the gift earlier than it otherwise would.
Such a gift is exempt from IHT, just as it is if made in your Will. However, it will not assist you in accessing the 36% rate on your death (if any share of your estate will be liable to IHT) as this applies only to gifts made on death.
Instead, a lifetime gift can potentially assist you elsewhere in the IHT system. The residence nil-rate band (RNRB) is potentially available in full to people when they die with an estate worth under £2million (in very general terms, as other conditions need to be considered). This £2million limit is applied before deducting any reliefs or exemptions and it excludes any gifts made during life. Therefore, for someone with an estate worth more than £2million who is also intending to make a gift to charity in their Will, it could potentially be more IHT efficient for them to instead make the gift during their life, if that will assist in getting their estate down below or near to the £2million threshold.
Furthermore, unlike with a gift in a Will, a lifetime gift can potentially give you an income tax saving. It could also result in the charity receiving a larger sum, although this depends on whether you gift cash, or other assets such as shares or land.
You will, no doubt, have heard of the phrase “gift aid” – this being something which you can choose to add on when making a cash donation during your lifetime. For every 80p which you donate and do not claim gift aid, the total donation remains at 80p. For every 80p which you donate and do claim gift aid, the total donation is increased to £1. That additional 20p is paid to the charity by the Government.
This in itself is very beneficial, but there is more. For higher rate and additional rate taxpayers, for every £1 of total gift-aided cash donation made, £1 extra of their higher or additional rate income will only be taxed at the basic rate. This is an income tax saving of up 25p per gift-aided £1. No basic rate tax is saved, because it is this basic rate tax (as paid to the Government) which the Government use to fund the gift aid payment.
Gift aid doesn’t exist for donations made in a Will and therefore, whatever cash is donated to a charity in a Will is the amount of cash which they will receive (assuming that there is sufficient value in the estate to pay it) and nor is any income tax saved.
Gift aid also doesn’t exist for donations of shares or land/property made during life and hence again, the charity only receives what is gifted to them. However, instead, full income tax relief is obtained, including basic rate tax relief. This is because the donation is deducted directly from your taxable income. For example, if you receive annual taxable income of £30,000 and gift £10,000 worth of shares to charity, you will only be taxed on £20,000 of income for that year.
There is a lot to think about when you are thinking about making a charitable donation. The Private Wealth team can assist you in making the most of this generous type of gifting when making them during your lifetime or in your Will.
Gifts in your Will:
- Exempt from IHT
- Can potentially reduce your IHT rate from 40% to 36%
- Allows you to continue to benefit from the cash/asset until you die
- Straight forward
- No income tax benefits
- No opportunity to claim gift aid
Gifts during life:
- Exempt from IHT
- Allows the charity to benefit earlier
- Allows gift aid to be claimed, if donation is cash
- Income tax saving – unless made by non-taxpayers (or basic rate taxpayers gifting cash)
- Provides no assistance with potentially accessing the 36% IHT rate on death
- Potential uncertainty as to whether you can afford to give up the cash/asset
If you would like further advice on charitable gifting in wills, please contact the Private Wealth team at Moore Barlow.