9 September 2019 | Comment | Article by Andrew Jones TEP

Remember A Charity Week | Myth #1 - Leaving a gift to charity is too complicated and not tax efficient

I am writing this blog to explode the myth that leaving money to charity by will is complicated, and not tax effective.

There are really two rules that you need to know about. The first of them is very simple indeed, and it is this: all gifts you make to charity are not themselves subject to any inheritance tax.

Taking some examples of this first simple rule:

  • At the one extreme, if you leave your whole estate to charity you will pay no inheritance tax on it whatsoever.
    At the other extreme, if you leave just £100 to charity, then while there may be tax on other parts of your estate, that £100 will be completely tax free.
  • The second rule is a little more complicated. It is this: if you leave more than 10% of your estate to charity, then the rate of tax on the rest of your estate falls to 36%, from the usual 40%. This can actually lead to a situation where leaving more money to charity leads to more money going to your family, also.

To explore this second rule, let’s imagine three elderly widowed sisters. Let’s call them Goneril, Regan and Cordelia (because I’m a Shakespeare fan). Each of them has an estate of £2 million. Each of them is a widow with their own nil-rate band and residential nil-rate band, and the same available for transfer from their late husbands, making a total of £950,000 in inheritance tax allowances. Each of them is considering leaving money to a charity. Each of them has one son who takes the balance of their estate.

 

Goneril

Regan

Cordelia

  Goneril decides to leave nothing to charity. Regan leaves £140,000 to charity. Look what happens if Cordelia leaves just £10,000 more than her sister Regan did to charity - that is to say, she leaves £150,000.
Estate: £2,000,000 £2,000,000 £2,000,000
Less: Nil-rate bands: £950,000 £950,000 £950,000
Subtotal: £1,050,000 £1,050,000 £1,050,000
Less: Gift to charity: £0 £140,000 £150,000
Taxable: £1,050,000 £910,000 £900,000
Tax at 40%: £420,000 40%: £364,000 36%: £324,000
  Goneril's son receives: £1,580,000 Regan’s son receives: £1,496,000 Cordelia's son receives: £1,526,000

 

On Goneril's death, her son receives the most of the three sons, but her estate suffers the most tax. Regan’s son received less than Goneril’s son. But less tax was paid, so Regan's beneficiaries benefitted more, overall. Cordelia’s legacy has exceeded the threshold at which the tax rate falls to 36%. So not only, has her charity received more than Regan’s, but also her son has received more than Regan’s. It’s a win-win!

Those of you who are especially skilled at arithmetic will have noticed that the distinction between Regan’s and Cordelia’s figures do not precisely accord with the “10% of the estate” mentioned above. This is because the threshold is, strictly speaking, “10% of the baseline amount of the estate”, which is a slightly different thing. But your solicitor will be able to write a will which ensures the baseline amount is applied correctly.

 

Remember a charity week | 9 to 15 September 2019

Remember A Charity Week is an opportunity for charities and supporters to come together and raise awareness about leaving gifts in wills to charities, after taking care of family and loved ones. Hugh James is proud to support the week which this year focuses on debunking some common myths around legacy giving. As part of that we are publishing a series of blogs demystifying common myths around charity legacy giving. Follow @HughJamesLegal on Twitter to keep up to date with all our blogs.

For this year’s theme, Remember a Charity are using nostalgia and humour to address some common misconceptions associated with legacy giving to show that it’s something everyone can do. They have created a series of comedy films inspired by a classic TV show from the 1970s, which are available to watch on their YouTube channel here.

 

 

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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