Leaving money to charity in your Will: How it could help you pay less tax

I don’t know about you, but giving money to charity makes me feel all warm and fuzzy inside. Like my heart’s snuggled up all cosy with a hot chocolate on a rainy day. It’s nice to do something nice. Now, imagine you could do something really beneficial for charity while also helping your nearest and dearest save money.

You can – all you need to do is leave money to charity in your Will. It’s a choice that’s becoming more and more common. Last year, a whopping 123,298 gifts were left to charities in their Wills. It’s the highest number ever recorded in the UK. Ever.

To be honest, I have no idea why gifting to charity is becoming so popular. Maybe everyone just woke up feeling generous one day, or maybe people have heard that by leaving money to charity in your Will, you can reduce the amount of Inheritance Tax (IHT) that you have to pay. That’s a pretty good reason, isn’t it?

In this blog, we’ll go through what Inheritance Tax is and how gifting money to charity can help reduce your final bill.

A stack of documents scattered across a desk.

What is Inheritance Tax?

Your possessions are known collectively as your estate (or assets). When you die, these pass on to your beneficiaries according to your Will (or by the rules of intestacy if you were unlucky enough to die without one).

Inheritance Tax (IHT) is a tax on your estate before it passes on to your beneficiaries. It’s charged at a rate of 40% of anything over £325,000. If your estate is worth less than £325k then it won’t be taxed. I’ll give you an example.

Say your estate is worth £500k. You’re only taxed on anything over £325k, so you’d have £175k worth of taxable assets. The tax rate is 40%, so the sum of the tax you need to pay would be £70k (40% of £175k).

To work out how much tax you need to pay just subtract £325k from the total value of your estate and work out 40% of that figure.

An image of a woman examining documents in front of her laptop, considering leaving money to charity in your Will.

How can leaving money to charity in your Will help avoid tax?

Inheritance Tax is pretty annoying, though. Sorry I breathed my last breath while owning stuff. Fortunately there’s a legal way to reduce Inheritance Tax whilst still being a nice person and contributing to something you’re passionate about.

I’m talking about leaving money to charity in your Will, and there are a couple of clear benefits to doing it.

Firstly, any assets you gift to charity are tax-exempt. They’re also deducted from the value of your estate before Inheritance Tax is calculated, so it’s calculated on a lower figure. By leaving money to charity in your Will, you reduce the amount of tax you need to pay. You might be able to avoid paying it altogether if you donate enough to take you under the £325k threshold.

Secondly, if you donate 10% or more of the total value of your estate to charity then your assets are taxed at 36% rather than 40%. I know 4% doesn’t look like too much, but remember how much money we’re talking about. That could be tens of thousands of pounds.

Obviously how beneficial it is depends on the total value of your estate. Leaving money to charity can be a way to avoid hefty tax bills, but it’s always worth consulting a professional Will writer to discuss how it would work for you.

A volunteer filling a box with donations for a food bank - in the box are tins, beans and a bottle.

Things to keep in mind

If you’re thinking about leaving money to charity in your Will there are a few things to keep in mind.

Make sure you’re specific about which charity you’re leaving a gift to. Don’t leave any doubt – some charities have very similar sounding names. If you just say you want to leave a chunk to the WWF, you run the risk of funding steel chair matches for sweaty men in tights rather than endangered rhinos. The easiest way to avoid this is to include the charity’s registration number.

This might sound obvious, but make sure that the charity you’re gifting to are a real, fully registered charity. If they aren’t officially registered then the gift won’t be classed as charitable and it won’t qualify for the tax-exemptions.

You can gift whatever you want. It doesn’t have to be a lump sum of money. Own a property you think a local homeless charity could get use out of? Gift it. Own a mini van that’d be useful for a local special needs charity? Gift it.

Finally, don’t forget that things can increase and decrease in value over time. Imagine you gift a property to a charity in your Will and then die 5 years later. In that 5 years, Taylor Swift moved in next door and now loudly practices in the garden. The value of the property quadruples. At least.

That’s fantastic, obviously, but your other beneficiaries might feel a bit aggrieved. The charity is now getting a much higher proportion of your estate. Maybe you’re fine with that, maybe you aren’t, but it’s an example of how the changing value of your estate could cause issues and friction down the line if you don’t think ahead.

If you plan ahead and do it right, leaving money to charity in your Will is a fantastic way to do someone good while also benefiting yourself. If you’re interested, get a Will today. Get in touch with us here at Vital Documents and we’ll be able to help you through the entire process. You can ring us on +44 (0)330 229 0331, drop us an email at hello@vitaldocuments.co.uk or arrange a call with us!

Share this post
Declan Ramsden
Declan Ramsden

Declan is a Content Creator at Vital Documents! He studied English Literature for 4 years before joining the company. Outside of work, he enjoys listening to retro music and reading classic novels – particularly Charles Dickens!

Articles: 24

Leave a Reply

Your email address will not be published. Required fields are marked *