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Inheritance Tax exemptions - giving to charity

Inheritance Tax Exemptions: Save 4% By Giving To Charity13th Oct 2020

by Clare Bland on 13th Oct 2020

Contact Clare Bland

How To Reduce Your IHT Liability By 4%

Donate 10% (or more) of your net estate to charity and the IHT liability on what is left drops from 40% to 36%. 

That may not sound much of a reduction but it can save you tens of thousands of pounds in many cases.

So you can give more of what remains in the estate to your loved ones – and less to the taxman.

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How To Benefit From The IHT Charity Exemption

Capitalising on this useful IHT exemption sounds very easy but there are some important considerations.

Hitting that 10% threshold is critical. It may sound simple in theory but the value of your assets is changing all the time. Property and investment values rise and fall in a continual state of flux – so you need to take account of that when you write or review your will.

If the value of your property and your investments rises sharply – a good problem to have – then fixed sum bequests to charity may no longer represent 10% of your (now much larger) total estate. So the exemption would not apply.


What About Your Partner, Children, Other Family And Friends?

This is an even more important consideration. What if you family’s financial circumstances change? What if you or your loved ones have a life-changing event and suddenly need much more money than expected.

We don’t just mean accident or illness – divorce or business collapse are just as capable of depleting your personal finances. They are very real dangers; even more so in these challenging times.

So think very carefully. Warm-hearted philanthropy is truly wonderful but charity begins at home.


Can I Donate To Any Good Cause?

The exemption applies to a qualifying charity registered with HMRC for tax purposes. HMRC scrutinises large donations in particular.

You can donate to more than one charity; the 10% does not have to go into one big pot.

But what if there were no charity bequests in the will at time of death? An exemption is still possible if all the executors consent to a Deed of Variation (vary the will) and donate to charity post-death. This Deed of Variation can be submitted with IHT400 form to HMRC.


Can I Avoid Inheritance Tax Completely?

That depends on the size of your estate. With careful tax planning, it is possible for a couple to use personal and property-related nil rate bands to exclude £1 million from IHT liability.

Furthermore, transfers between spouses are exempt from IHT (as the legendary Sir Ken Dodd proved, marrying his long-time partner Anne just two days before he died). An inter-spouse transfer may enable you to carry over some tax allowances for future use.

HMRC-approved gifting using Potentially Exempt Transfers (PETs) is also a possibility. There is no IHT liability if you survive for seven years after making your gift. This is one of many quite generous gift allowances allowed by HMRC. There are lots more – ask us about them.

And then there are trusts. They are not just for the super-wealthy. Anyone can use them but you need the right one for you.

There is also another way. You could leave your entire estate to charity. That might sound incredible but I had a case of this kind recently. Let me tell you about a remarkable man…


The Philanthropist Who Gave Away £1.2 Million

For client confidentiality reasons, we cannot name the very generous man who gave his whole estate to charity. But we can tell you a little about the amazing legacy he has left – and how he came to leave it.

The gentleman concerned was not ostentatious. Quite the opposite. This 82-year retired salesman lived alone in an average three-bedroomed house in a quiet suburb of Poole. He had no wife or children. He lived a thrifty life, owned a modest car, watched his energy bills closely and every so often enjoyed a Wetherspoons meal.

When his time came, he asked his friends to be the executors of his will. He asked them to give his entire estate to charity, leaving the choice of which good causes to them.

They divided his estate among the charities they knew would mean the most to him. These included Dorset Cancer Care Foundation and Bournemouth Hospital Charity, notably the Walkerbot Appeal.

His wonderful donations will bring hope to those living with the impact of cancer and strokes.

They are also a reminder that donating to charity and supporting the state’s vital public services need not be an ‘either/or’ choice.

Sometimes they can be one and the same.


Get Expert Legal Advice

Find out more out how to structure your will in the most tax-efficient way. Contact Coles Miller wills solicitor Clare Bland for more information.