Before you scroll on past and say, “well I have children, all my assets pass to them, so this does not concern me”, or indeed “ charity begins at home ”, let’s consider some facts, which may make you think twice.
Who gives to charity?
In 2017 a staggering £10.3billion was donated to charity. Let’s consider for a moment why? Generally, charities exist because there is a gap in the ‘market’ where there is no or little government or other funding. To many people, a charity offers a lifeline. It offers something that is not paid for by taxes.
Socially, charity is a necessity and it is not just those in financial need that come into contact with charity. Charity takes the burden for medical research, health services and taking care of vulnerable people in society. It is the backdrop for our religious, cultural and educational establishments. Most people will have some contact with charity in their life, whatever their background.
In 2019, Legacy Foresight produced their annual report on legacy and in-memory giving and it makes for interesting reading. Of the total donated to charity in 2018, £5billion of that was from legacy and in-memory giving. That is half of all charity giving! The trend looks set to increase.
OK, but why would I want to give to charity in my Will?
Well, aside from the rosy glow you will feel when you have put that all important legacy into your Will, there is one big reason why you might want to consider a legacy to charity in your Will and it is tax. For most of us, we all want to pay as little as possible. By considering a gift in your Will, not only will you be a social superstar, you may also help to reduce the Inheritance Tax bill that your family may have to pay. It’s a win win!
How do I know if my estate will have to pay Inheritance Tax?
Everybody has something called a Nil Rate Band. This is an amount you can leave to anyone (other than your spouse) free of tax. You may be amazed to know that the Nil Rate Band is only £325,000. It’s not a lot really, when you consider the value of property in the South East. If your estate is worth more than that, then Inheritance Tax is payable on anything over that amount at 40%.
If you have children and a house and you leave your house to them, then your estate may also be able to claim the Residence Nil Rate Band. This is an additional £150,000 tax free allowance. This means the maximum you could potentially leave without paying Inheritance Tax is £475,000. This rises by £25,000 in April.
So, let’s give an example. John is divorced, he has two children and as part of the divorce settlement he received the family home worth £500,000. He has some savings and other assets worth around £100,000. He wants to leave his whole estate to his children equally and he makes a homemade Will on those terms. John dies shortly afterwards. His estate is valued at £600,000. His estate will benefit from the two Nil Rate Bands, currently totalling £475,000. Inheritance Tax is therefore payable on £125,000 at 40% – a total of £50,000 in Inheritance Tax leaving £550,000 to his children.
But consider the position if John had left a legacy to charity in his Will
What John didn’t know is that if he had spoken to a legal professional and asked them to assist him with drafting his Will, they would have told him about the charity exemption. This exemption provides that any gifts you make to charity in your Will are completely exempt from Inheritance Tax. Not only that, if you leave 10% of your taxable estate to charity (it is a bit more complicated than that, but I won’t go into the calculations here), the rate of tax payable is reduced to 36%.
When you crunch the numbers, you may well find that less Inheritance Tax is paid, without your beneficiaries’ entitlement changing substantially.
It will make a difference even if it is not a large gift. If you have a taxable estate of any size and you leave £1000 to charity, that is £1000 that is not taxable, saving £400 in Inheritance Tax. The gift to charity is therefore only costing your estate £600.
So what should you do?
For many of us, it simply isn’t affordable to give a gift to charity in our lifetime. But most of us are worth more later in life and indeed after we have died, so a gift in your Will may well be the best time. With over 185,000 registered charities in the UK, there is something for everyone.
So, if you want to get that warm feeling that you are doing your bit, as well as paying less tax, why not make an appointment to see the friendly, professional team at Colemans to discuss adding some charity donations to your Will?
Colemans (part of Parfitt Cresswell) is proudly supporting St Peter & St James Hospice in North Chailey in 2020 and are taking part in their charity Will Writing Month in April, so keep a look out for more information.
For further information or advice please call us on 0800 999 4437 or email firstname.lastname@example.org