The most tax efficient ways to give to charity

14th November 2014

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Leaving money to charity when you die not only helps a good cause but can cut the inheritance tax (IHT) bill for your family.

Not only is money left to charity exempt from IHT but leaving 10% of an estate to charity automatically reduced the IHT rate from 40% on assets over the nil rate band threshold of £325,000, to 36% – reducing the amount your loved ones have to pay.

Ian Dyall, head of estate planning at advisory firm Towry, said individuals who were considering leaving a percentage of their estate to charity may want to increase the amount to 10%, leaving your family and the charity better off.

He uses the example of an estate worth £825,000. After the £325,000 nil rate band is applied it leaves a net estate of £500,000 of which is taxable for IHT.

Leaving nothing to charity would mean a tax bill of £200,000 on the net estate, with the beneficiaries receiving £625,000 in total.

If you left 4% of the estate to charity, it would receive £20,000 from the net estate and the beneficiaries would receive £613,000 in total. However, leaving 10% to charity, a total of £50,000 of net estate, still means the beneficiaries receive £613,000 because of the reduction in IHT to 36%.

Dyall said individuals can also leave surplus pension funds to charity, that are passed over tax free to the good cause.

‘Gifting via your will is not the only way of gifting to charity. Another way is to leave your surplus pension fund,’ he said. ‘Funds paid as a lump sum to charity are free of tax, whereas lump sums paid to your family could be subject to a 55% tax charge – although proposals were announced in the Budget to bring this figure down to the donor’s marginal income tax rate.

‘So in some cases it may be more beneficial to use your pension fund to make charitable gifts, even if the remainder of your estate is then subject to the full 40% IHT rate.’

He added that a person may also choose to gift through their lifetime so ‘the charity benefits earlier, and Gift Aid will increase the gift to the charity and may reduce the tax liability of the donor’.

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