28 Jun 2022

Giving money to charity in your will

Charitable donations are a great way to give something back when writing a will. And as we’ll explore, when you create a will there are situations where you can claim tax relief on charitable donations. Whatever your motivations, donating to charity could be a rewarding endeavour as you plan your legacy.

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How to leave money to a charity in your will

Your will is an opportunity to state what should happen to your money, property and possessions, but also, to specify any charitable donations. You can write a will yourself, or use a legal professional – the latter may be easier if your estate is complicated.

When leaving a gift in your will to a charity, you can state whether you’d like to donate a fixed amount, a specific item, or whatever sum of money remains once the other gifts have been distributed. In order to be legally valid, your will needs to be formally witnessed and signed.

How to know which charity to donate to

There are many deserving charities, so how can you know which charity to donate to? Here are some things to consider when donating to a charity in your will.

1. Search online. The Charity Commission has an online database of UK charities with information such as what the charity does, who their trustees are, and whether they’ve ever had action taken against them. Making sure you’ve chosen a reputable charity is an important step if you’re looking to donate to charity in your will.

2. Assess their impact. Charities publish annual reports that include information on their activities, goals and achievements. You can also review their accounts, which will give you a sense of what proportion of their income is spent on fundraising or administration.

3. Check for red flags. When you search for a charity through the Charity Commission, you will be able to see if they are subject to a statutory inquiry. If they are, it means there are concerns about the way the charity operates and it is being investigated for misconduct or mismanagement.

Aside from these key criteria, donating to charity is very much a personal decision. Do you wish to support a local charity or one with a global reach? Is there a cause that’s close to your heart for personal reasons? By making a decision that feels right, you can feel proud of the impact your donation will make.

By making charitable donations in your will, you can reduce your Inheritance Tax bill. If you make a gift to charity, the ‘net estate’ is reduced by the amount of the gift. So in theory, making a charitable donation may be effective in reducing the amount of Inheritance Tax payable in cases where the value of the estate exceeds the nil rate band (currently £325,000), and the estate may qualify for the residence nil rate band (RNRB).

In short, the gift to charity reduces the net value of the estate. Moreover, if a donation is less than 10% of the estate, it could mean a reduction in the amount of Inheritance Tax paid. This is because the donation would be deducted from the net estate before the Inheritance Tax payable has been calculated.

How charitable donations affect inheritance tax
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Case studies on charitable donations

1. When Penny died, she left her estate worth £500,000. She had never married and had no children. In her will she left £10,000 to a qualifying charity, and the balance of her estate to her niece.

Penny’s total estate of £500,000 is reduced by the charitable gift to £490,000. When we subtract the nil rate band of £325,000, Penny’s taxable estate is £165,000. 40% of this figure is £66,000 – the payable amount.

The charitable gift reduced the Inheritance Tax payable on Penny’s estate by 40% of £10,000, or £4,000.

2. Pat Silver died, leaving a net estate of £1 million, split equally between his two children Peter and Jane. The Inheritance Tax payable on the estate was £400,000 (40% of £1 million), leaving £600,000 after tax (£300,000 per child).

So, what if Pat had left 10% of his estate to charity? This sum would equal £100,000, meaning the amount where Inheritance Tax would be payable could be reduced to £900,000, and the rate of Inheritance Tax could be reduced to 36%.

The Inheritance Tax payable on the estate would now be £324,000 – a reduction of £76,000. The children receive £576,000 (£288,000 each) and the charity receives £100,000 – a total of £676,000.

The gift of £100,000 to the charity may effectively cost the children £24,000 as a result of the Inheritance Tax savings.

For clarity, the net estate is the value of the estate after deducting any debts, liabilities, reliefs and exemptions, and the nil rate band and residence nil rate band, as appropriate.

Please note that the method of calculation as described above has been simplified for illustrative purposes only. This isn’t necessarily the method of calculation to be used in practice.

Tax relief on charitable donations

If you donate land, property or shares to charity, you don’t need to pay tax on this, and can get tax relief on Income Tax and Capital Gains Tax. You should keep records of the donation to prove that the property was donated to a charity, and because the charity could one day ask you to sell the property on its behalf.

5 ideas for donating to charity

There are so many worthy causes that deserve support, so how can you know which charity you should donate to? If you’re looking for some ideas, YouGov has listed the five most popular UK charities according to their data:

1. Cancer Research UK

2. St. John Ambukance

3. Macmillan Cancer Support

4. British Red Cross

5. British Heart Foundation.

Leave a little extra for your loved ones

Donating to charity is a commendable gesture when putting together a will, and once you’ve given generously to a good cause, you could consider leaving a little extra for your nearest and dearest. Over 50s Fixed Life Insurance could be a way for you to leave some money to your loved ones after you die. The money could be put towards a small gift, or even to help meet some of the costs of a funeral.

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