Did you know that it is possible to leave money in your will to charity and in doing so leave more money in your estate for your family?
This obviously seems too good to be true and the obvious question is ‘if the charity is getting more and my children are getting more, who is getting less?’. The answer is that HMRC are funding the difference.
In our role working with clients, we spend a lot of time reviewing their wills, death benefit nominations and LPAs. This is a standard part of our core service and we often find that these documents are out of date. It is fairly common to see fixed amounts being left to remoter family members and also to charity. Gifts to remoter family members we will deal with in a future blog.
If you have left a set amount to charity in your will, this needs to be reviewed to make sure that you aren’t missing out on a valuable tax relief. If you leave 10% of your taxable estate to charity, your other beneficiaries benefit from a reduction in the inheritance tax (IHT) rate from 40% to 36%.
First, work out what the total charity bequests are as a percentage of your taxable estate. Your taxable estate is the amount of your wealth liable to IHT, therefore after all allowances and exemptions. Your allowances and exemptions are broadly; Nil Rate Band(s), Residence Nil Rate Band(s), Pensions, Trust assets and any other exempt assets such as those that qualify for Agricultural or Business Relief.
If the percentage is 6% then it will not cost your family anymore to increase the gift to 10%. If the percentage is between 6% and 10% then increasing to 10% will result in your family receiving more money.
Even if your percentage is less than 6% the cost to the family is not huge and bear in mind that the percentage will increase as your taxable estate reduces (assuming that your adviser is working with you to achieve this).
This chart shows how the benefit to your family of the 36% IHT rate, increases as your existing gift gets closer to the magic 10% number. Where the green line rises above £0, your family are receiving more as a result of you leaving more to charity.
This IHT relief was introduced by George Osbourne in 2012 and so wills prior to this date will not have a provision to maximise this allowance and many wills after this date seem to have also not taken it into account.
If you have any questions about this relief please contact our office. We advise clients on this and wider inheritance tax planning across Hampshire, Surrey, Berkshire and nationally using the latest technology.