Gifting

The current rate of Inheritance Tax is 40% and that rate is charged on every pound by which your net estate, which is the value of everything you own at the time of your death, less any debts and mortgages, exceeds the sum of £325,000, if you are a single person without direct descendants. If you are survived by your spouse (wife, husband or civil partner) and leave everything to them, there may be no Inheritance Tax payable on your death, but Inheritance Tax would be payable on the death of the survivor if the combined assets exceed £650,000 and you do not leave any direct descendants.

As well as the ‘general’ Inheritance Tax-free allowance, there is also now a new allowance for gifts of property to your direct descendants. At the moment, this allowance, where it applies, is a maximum of £175,000 although it is capped at the value of your property interest, if lower. Together with the general Inheritance Tax-free allowance, this could mean that some couples would be able to claim up to £1 million in Inheritance Tax-free allowances, but this is not the case for everyone.
Where Inheritance Tax does apply, it may be possible to reduce the Inheritance Tax rate due on your estate from 40% to 36% if you leave 10% of your net estate to charity. For example, if a single person without descendants leaves a net estate of £600,000, £275,000 of this (which is £600,000 less £325,000) is subject to Inheritance Tax at the rate of 40%, meaning a payment to HM Revenue & Customs of £110,000 without any other reliefs or allowances.

If, instead, they had left a legacy of £27,500 (or a number of legacies making up that value) to charity, that sum of £27,500 would also be deducted from their net estate before Inheritance Tax was calculated. This means that a net estate of £600,000 would have £325,000 and £27,500 (which is the amount of the charitable legacies left in this particular will) deducted before Inheritance Tax was calculated on the reduced net estate. At first blush, this would mean Inheritance Tax due of £99,000. However, as the legacies meet the amount needed to gain the lower, 36% rate, the Inheritance Tax actually due would be £89,100.

So, instead of a payment of £110,000 to HM Revenue & Customs, the amount due with the charitable legacy would be £89,100. In fact, taking into account the reduced Inheritance Tax, the legacy would only ‘cost’ the estate £6,600 (being the £27,500 legacy less the tax saving of £20,900) and that £20,900 would instead pass to a charity rather than into the taxman’s pocket.

So, you will be able to see that leaving legacies to charity, which is good in itself, can also assist further to reduce the amounts of Inheritance Tax payable to HM Revenue & Customs. Above all, if you are considering making a will or revising an existing will, you are strongly advised to seek advice from your legal advisers as there are other measures which may be available to you, which may help reduce your estate’s Inheritance Tax liability a little further.