Taxes on death – gifts to charity can help
21st October 2022
“In this world, nothing is certain except death and taxes” Benjamin Franklin
It is often the case that whilst we accept death is a certainty for us all, the payment of tax upon death can cause considerable anxiety and is a major fear factor. However, understanding Inheritance Tax (IHT) and being aware that there are options to mitigate tax can allay the fear of the unknown. Leaving a gift to charity is one way to achieve this.
Lorna Bastian is a Private Client Partner at Aquabridge Law, based in Chelmsford. As a specialist in the field of Wills, Trusts and Probate Lorna advises clients in relation to their estate planning. We asked her to explain IHT “simply” and how leaving a gift to charity can be a helpful option.
“Partnering with clients to understand their personal circumstances and what is important to them usually leads to consideration of their inheritance tax (IHT) position,” says Laura.
“These discussions will often include gifts to charity, either during lifetime or as part of estate planning. Essex Community Foundation provides a potential solution for many of my clients which I am pleased to talk about. They may be interested in setting up a charitable fund in their name after they die or if they start giving during their lifetime, it can be a rewarding and enjoyable experience, while also mitigating tax.
“Let’s consider a couple – Max and Lisa – they are married and have had successful careers leading to retirement at 55. They have a property worth £700,000 which is mortgage free, and each have savings of £200,000. Their total estate is therefore worth £1,100,000.
Assuming they have made no gifts in the seven years before their death they would each have a nil rate band for Inheritance tax of £325,000. If Max dies first and leaves everything to Lisa in his will, then when Lisa dies, she would be able to claim the transferrable nil rate band because the estate was spouse exempt passing to her. Lisa’s estate would have two nil rate bands totalling £650,000 (her own and Max’s nil rate band) and they both want to leave their estate to nieces and nephews on second death.
How much would they have to pay in Inheritance tax?
£1,100,000 less £650,000 (at 0%) = £450,000 chargeable estate
£450,000 is subject to IHT at 40% therefore the IHT liability would be £180,000
So, with the above scenario, they arrive at the office of their professional advisor and ask what could they do to reduce the amount of Inheritance tax?
- They could plan to utilise their gifting allowances during lifetime. More information on this can be found at www.gov.uk/inheritance-tax/gifts.
- If they used their tax-free allowances, they could also elect to make lifetime gifts in excess of these allowances, known as Potentially Exempt Transfers (PETS). If you survive for seven years having made a bone fide PET this would reduce the value of the estate for IHT purposes.
- They could consider the structure of their wills and include legacies to charities which would be exempt from Inheritance tax. These can be registered charities or if they wished to establish their own foundation in their lifetime, they could do so with the help of Essex Community Foundation. Charities are exempt from IHT therefore any legacy to a registered charity would not be chargeable to IHT.
- If Max and Lisa wanted to structure their wills to include a charitable gift so that at least 10% of their net estate was passing to charities this would result in a reduction in the Inheritance Tax Rate. Rather than payment of tax at 40% this is reduced to 36% so the tax liability would be much less.
What you might not be aware of:
If Lisa and Max had not considered the position before they died, and the beneficiaries of their estate wanted to support charities, they would also have the option to enter into a Deed of Variation to include charitable legacies from their inheritance, and this again would have the result of reducing Inheritance tax if the Deed of Variation was signed within two years of the date of death.
If you are interested in making a gift to charity as part of your estate planning, please contact us on 01245 355947 or email perry@essexcf.org.uk to discuss your ideas and wishes. It is always advisable to talk to a financial adviser to ensure you are fully aware of the tax implications.