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Inheritance Tax And Gifts To Charity

View profile for Gail Donaldson
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Reduced Inheritance Tax bill has always been the reward for those who chose to leave some or all of their assets to charity – whether this is by a legacy or by a share of their total estate.

The calculation of Inheritance Tax is complicated and there are lots or rules to ensure that all of an individual’s taxable assets and gifts made in the last 7 years of their lives are taken into account when calculating the total bill.  We would be happy to help you look at your personal circumstances and work out your tax bill.

Broadly speaking however any gifts to charity in your Will will be deducted from your taxable estate and save you Inheritance Tax on them at 40% - though of course your other beneficiaries do get less overall than if you had not paid a legacy to charity at all.

From April 2012 the government introduced a further incentive for those wanting to benefit charities in their Wills.  The new rules mean that Inheritance Tax is now payable at 36% rather than 40% to estates where 10% or more of the net estate is left to a charity.  The net estate is what is left after all debts and liabilities, Inheritance Tax exemptions and the tax free sum (which is currently £325,000) have been deducted from the gross estate.

In some circumstances working out the net estate can be complicated as you need to look at assets that the individual owns outright, assets that the individual was entitled to benefit from in a Trust, and assets that an individual owns jointly with other people.  However assuming all the rules apply and the gift meets the 10% rule then the tax rate reduces to 36%.

Most of us do want to benefit family and friends under our Will but may be happy to leave a smaller amount to charity.  Anyone already planning to leaving more than 4% of their net estate to charity should consider increasing this to 10%, as the reduced rate of tax from 40% to 36% can increase the amount paid to the charity and also the amount paid to the remainder of your beneficiaries with a smaller Inheritance Tax bill being payable.  The calculations can be quite complicated and we are very happy to help you work through them to see if an increased gift would be favourable in your personal circumstances.

It is also possible after someone has died for their beneficiaries to use a Deed of Variation within two years of their death to create or increase a charitable legacy to take the benefit of the 36% tax.

The results can be quite surprising and can give you the pleasure of helping your favourite charity and your family at the same time.