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Leaving money to charity? Let the taxman help too

2nd June 2014 Print

With examples such as the London Marathon, which has raised over £600m for various charities since it was first run in 1981, Britain is a country with a strong desire to help charitable causes. However, many Britons are not considering making charitable donations from their estate. A new survey for Towry, the wealth adviser, has shown that nearly three quarters (72%) of retired adults are not intending to leave(or have left) money to charity in their will. This is despite the potential benefits that leaving a portion of your estate to charity offers.
Towry’s head of advice policy, Kate Turner outlines the key benefits as to why you should consider leaving some money to charity in your will:
“There are two tax benefits gained by leaving money to charity. Firstly, the money you leave to charity is exempt from inheritance tax; and secondly, if you leave at least 10% of your net estate to charity then the inheritance tax rate on your remaining estate will be cut from 40% to 36% - a policy which has been in force since April 2012 (the net estate is effectively what you leave minus inheritance tax reliefs and the nil rate band, which is set at £325,000 until the 2018-19 tax year).
“This means that, if you were already considering leaving over 4% of your estate to charity, you may wish to increase this to 10%. This is because your family (due to the reduction in inheritance tax rate) and the charity you want to benefit would be better off.
“From the example in the table below, you can see that if you had a net estate of £500,000, and you left 4% to charity, your charity would receive £20,000 and your beneficiaries would receive £613,000 after accounting for inheritance tax and the gift that has been made. Your beneficiaries would receive exactly the same amount if you increased your gift to 10%, except now the charity would receive £50,000.  This is because the savings on inheritance tax have compensated for the increased amount you left to charity.
You can also see from the table that if you were already intending to leave £45,000 (9%) to charity, by increasing this to £50,000 (10%) your beneficiaries will receive an additional £15,000.
Also, a gift of £50,000 to charity would only cost the beneficiaries £12,000 (i.e. they would receive £625,000 if you gift nothing versus £613,000 if you gift £50,000 to charity).

“Gifting via your will is not the only way of gifting to charity.  Another way is to leave your surplus pension fund. Funds paid as a lump sum to a charity are free of tax, whereas lump sums paid to your family could be subject to a 55% tax charge (although proposals were announced in the Budget to bring this figure down to the donor’s marginal income tax rate).   So in some cases it may be more beneficial to use your pension fund to make charitable gifts, even if the remainder of your estate is then subject to the full 40% inheritance tax rate.
“You may also prefer to give during your lifetime. This way the charities benefit earlier, and Gift Aid will increase the gift to the charity and may reduce the tax liability of the donor.  You might also find this more personally rewarding, by seeing the benefits of giving while you’re alive.
“The best way to donate to charities will depend on a number of different factors, including the size of the gift and your tax position, so whatever provisions you may want to make to give to charity, either now or in the future, you should consult a good financial adviser who will consider the options, and help produce a plan to map out your financial future.”