Charitable Bequests and Inheritance Tax

In the UK and European Economic Area, donations made to registered charities during your lifetime or specified in your will are exempt from IHT. Thus, when IHT on your estate is evaluated upon your demise, the money or assets you choose to leave for charities are excluded from the overall worth of your estate. Investors Chronicle has a useful guide.

Gifting to charity can help lower the overall value of your estate, ensuring that the remaining inheritance falls below the taxable threshold, thereby avoiding hefty IHT. For example, if you bequeath a portion of your wealth to charities, the net worth of your estate could potentially fall below the £1 million inheritance tax threshold, and no IHT would be due.

The Potential of Reduced IHT Through Charitable Donations

The often confusing terminology of tax laws can be challenging. A term to get familiar with is the “nil-rate band”, also known as the Inheritance Tax threshold, which is set at £325,000 along with the Residence Nil-Rate Band (RNRB), a further allowance of up to £175,000 available under certain circumstances.

The standard IHT rate is 40%, charged on the net taxable value of your estate, after individual exemptions and the nil-rate band are accounted for. However, this daunting 40% rate can actually be lowered to 36% if an individual leaves a minimum of 10% of the net value of their estate to charity. Such a provision was introduced to motivate more individuals to bequeath money to charities through their wills.

Remember, qualifying for this reduced 36% rate needs meticulous planning and professional advice on drafting your will. The amount left to charity must exceed 10% of the “baseline amount”—the estate’s value calculated after deducting liabilities and exemptions, but before accounting for the charitable donation and the RNRB if applicable.

The Promise of Consistency and the Fear of Change

Under current conditions, individuals are entitled to a nil-rate band (up to £325,000) and a RNRB (up to £175,000). However, these generous allowances come with caveats. For instance, the RNRB is available if the estate includes the individual’s main residence inherited by a direct descendant, like a child or grandchild. Any unused allowances from a spouse’s previous demise can also be rolled over, making it feasible for estates worth up to £1 million to be exempt from IHT.

However, being familiar with IHT regulations is not just about leveraging current allowances. As new governments take office or existing ones change priorities, tax legislation can face shakeups. For instance, the current government has stated that nil-rate bands will remain constant until the 2027-28 tax year. Despite this promise, rising house prices are pulling more individuals into the IHT net, with growing IHT receipts as proof.

With the next general election due soon, the potential for change increases. However, predicting future amendments in legislation is nearly impossible. Your best bet is to align with the legislation as it currently stands while keeping an eye on governmental shifts.

Navigating Change and Safeguarding Your Estate

You might wonder what happens if there are changes in the IHT rules after your demise. Even then, mechanisms exist to ensure your estate’s IHT exposure remains minimal. For example, you could leverage your annual gift exemption of £3,000.

However, these financial decisions should ideally be made after thorough discussions with a tax advisor. If you’re apprehensive about your possible IHT exposure, seeking professional advice will help you review your estate in detail and plan for different scenarios