People are being urged to consider leaving charitable bequests in order to reduce inheritance tax.
Highlighting the notion that charitable donations may have benefits beyond helping a good cause, consumers are being encouraged to think about the value of their total assets, and whether making donations could be advantageous for beneficiaries.
Whilst making a will is an important step in consolidating one’s final wishes, inheritance tax can be a problem for many of those set to benefit from a will. At present, the threshold for inheritance tax stands as £325,000, with the Residence Nil-Rate Band currently adding a further £100,000 for those passing on a property to direct descendants. Any amount over this band is subject to tax.
Whilst this may not be a problem for smaller estates, it can seriously impact the value of larger estates that fall over the threshold.
However, when 10% of an estate is donated to charity, a tax break is applied, meaning that the amount of inheritance tax will fall – dramatically in some cases. Rather than 40% of the amount above the threshold being taxed, the percentage drops to 36%.
For example, if the total value of an estate is £500,000, the amount subject to tax will be £175,000 on the assumption that the RNRB does not apply. This would be taxed at 40% resulting in a total of £70,000 being owed.
However, this amount would be significantly reduced if 10% of the total estate was left to charity.
If £50,000 was left as a charitable donation, the estate value would fall to £450,000, meaning the taxable amount would similarly drop to £125,000. As this would be taxed at the lesser rate of 36%, this would mean the inheritance tax owed would fall to £45,000.
Despite the potential benefits that this could have for beneficiaries, recent research has suggested that the majority of people are extremely unlikely to make a charitable donation in their will.
According to a study by Graysons, just under half of the respondents (48%) stated that they were extremely unlikely to leave any money to charity in their will. The survey which looked at the responses of 1,000 18 – 65-year-olds in Yorkshire and the Humber found that just 18% of those asked were either fairly likely or extremely likely to make a charitable donation in their will.
Whilst the reasons for this vary, a lack of charitable donations could have more serious consequences for charities nationally. As Graysons highlight, a lack of adequate funding could hinder the amount of support that charities are able to provide, as well as their ability to affect change.
In light of this, the importance of drawing attention to the impact of a 10% charity bequest becomes more significant. By highlighting that a charitable donation could reduce inheritance tax as well as helping a good cause, clients may be far more inclined to do so.
