Charitable legacies and deeds of variation: how to boost your giving tax-efficiently

Leaving a charitable gift under your will may enable you to make a substantial donation to a cause you care about, perhaps as an expression of thanks to God for an organisation which has played a significant role in your life or in the lives of your family. Receiving an inheritance could enable you to make a gift in memory of your loved one or to donate a significant sum to Christian ministry. But did you know that such gifts can also be highly tax-efficient?

When a person dies, any excess value of their estate over the inheritance tax threshold of £325,000 (sometimes called the ‘nil rate band’) is subject to Inheritance Tax at 40%. Legacies to the donor’s surviving spouse or to charity are free of inheritance tax.Example: Mary leaves £325,000 to her godchildren and the residue of her estate to charity. Her estate will not pay any Inheritance Tax, because the charitable gift is exempt, and the amount left to her godchildren doesn’t exceed the inheritance tax threshold.

Example: Mary leaves £325,000 to her godchildren and the residue of her estate to charity. Her estate will not pay any Inheritance Tax, because the charitable gift is exempt, and the amount left to her godchildren doesn’t exceed the inheritance tax threshold.

The potential tax relief can be even more generous than this. If 10% of a person’s taxable estate is left to charity, not only will that legacy be exempt from Inheritance Tax, but any amount left to non-charitable beneficiaries will be taxed at a lower rate of 36% (a 10% discount to the ‘normal’ rate of 40%). In effect, the cost of the charitable gift is split between HMRC and the non-charitable beneficiaries. So, if you’re considering a charitable gift under your will, it’s worth checking with your will writer whether increasing your planned gift could in fact further boost your support for your favourite charity at a minimal cost to your family members.

Example: John has assets worth £500,000. He wants to leave £6,000 to charity and divide the rest equally between his four nephews. After deducting the Inheritance Tax threshold of £325,000 and the charitable gift of £6,000, the balance of £169,000 will be charged to Inheritance Tax at 40%. £67,600 tax will be payable, and each nephew will receive £106,600.

After talking to his solicitor, John increases his charitable legacy to £17,500 (10% of his estate net of the Inheritance Tax threshold). After deducting the Inheritance Tax threshold of £325,000 and the charitable gift of £17,500, the balance of £157,500 will be charged to Inheritance Tax at the lower rate of 36%. £56,700 tax will be payable, and each nephew will receive £106,450.

So, the charitable donation can be almost three times as high, at an effective cost of just £150 to each nephew and a tax saving of £10,900.

What if you’re receiving an inheritance from someone who has already died? Within two years of a person’s death, you can make a ‘deed of variation’ to redirect some or all of your inheritance to charity and achieve the same tax-efficient boost to your favourite cause. Deeds of variation can be complex and so we would strongly encourage you to have yours drafted by a lawyer.

For more information about legacy giving and how Stewardship can help you with this, please see Stewardship’s Briefing Paper available here.

 

Disclaimer: Stewardship may provide general guidance about charitable giving for information purposes only. We do not offer tax, legal or investment advice and you are encouraged to seek advice from a qualified professional on your specific situation.
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Rachel Steeden is a solicitor with 17 years’ experience advising private clients and charities. She enjoys working closely with clients and their advisers to help donors make complex gifts effectively and tax-efficiently. She is a member of the Charity Law Association, STEP Special Interest Group for Philanthropy, Lawyers in Charities and Lawyers’ Christian Fellowship. Rachel and her husband Derek lead a Bible study group at their church in central London. They’re passionate about Church Planting in the UK and overseas, Bible translation and The Local Church.