We are increasingly finding that parents with substantial estates do not necessarily feel that all of their wealth needs to pass to their children on death. This is particularly so where lifetime gifts have already been made, or where the children are otherwise expected to be well provided for. In those circumstances, clients often ask whether part of their estate could instead be used to support charitable causes that matter to them, rather than increasing the inheritance tax paid to HMRC. The gifts to charities being regarded as a form of tax targeted at causes the client supports.
A charitable gift in a Will is exempt from IHT. In addition, where at least 10% of the taxable estate is left to charity, the rate of IHT on the remainder falls from 40% to 36%.
The figures can be surprisingly attractive.
Example
Assume a married couple have a combined estate worth £5 million and three adult children.
On the first death, they leave everything to the survivor, so no IHT is payable because of the spouse exemption.
The survivor then dies with the full combined nil-rate bands available (£650,000) leaving everything equally to the children.
Option 1: Leave everything to the children
| Amount | |
| Estate | £5,000,000 |
| Less combined NRBs | £650,000 |
| Taxable estate | £4,350,000 |
| IHT at 40% | £1,740,000 |
| Children receive | £3,260,000 |
Option 2: Leave 6% (£300,000) to charity
| Amount | |
| Charity receives | £300,000 |
| IHT payable | £1,620,000 |
| Children receive | £3,080,000 |
Compared with Option 1:
- The children receive £180,000 less (£60,000 less each).
- The charity receives £300,000.
- HMRC receives £120,000 less.
Option 3: Leave enough to qualify for the 36% rate
The taxable estate after the nil-rate bands is £4.35 million, so a charitable gift of £435,000 meets the 10% threshold.
| Amount | |
| Charity receives | £435,000 |
| IHT at 36% | £1,409,400 |
| Children receive | £3,155,600 |
Compared with Option 1:
- The children receive only £104,400 less (only £34,800 less each).
- The charity receives £435,000.
- HMRC receives £330,600 less.
Better Than 40% Tax? Using Charitable Giving to Reduce Inheritance Tax
People are increasingly selective about where their wealth ultimately goes. Some feel that their children are already financially secure and would prefer a proportion of their estate to support medical research, education, the arts, environmental projects, local community initiatives or other causes that reflect their values.
The figures above illustrate an important point. By structuring charitable gifts carefully, it is often possible to redirect a significant sum from taxation towards causes that matter to the family, while having a relatively modest impact on the inheritance received by children.
For families with substantial estates, charitable giving can therefore become an important part of both tax planning and legacy planning.
If you would like to explore how charitable gifts might fit into your Will and wider estate planning arrangements, our private client team would be pleased to discuss the options with you.
Ian Newcombe is a partner in the Wealth Protection Team of Stephens Scown LLP.