Charitable giving and reduced rate of inheritance tax

At present, gifts to charities in your Will are exempt from inheritance tax and would be taken off the value of your estate before inheritance tax is calculated. Leaving money to charity in your Will could also reduce the rate of inheritance tax you pay.

The reduced rate of inheritance tax was introduced by the Government in 2012 in order to encourage people to leave money to charity in their Wills. If the estate qualifies, it reduces the inheritance tax rate which is charged from 40% to 36%. To qualify, at least 10% of your net estate (or baseline amount) must be left to a charity or charities. The net estate is, generally speaking, the value left after the inheritance tax nil rate band (which is currently £325,000 and frozen at that level to 2026 or up to £650,000 if there is a transferable nil rate band from a deceased spouse).

How the reduced rate works in practice is perhaps best demonstrated by the following example:

Frank died on 5th May 2021 leaving an estate valued at £900,000 after deduction of liabilities. He was a bachelor and didn’t have any children.  In his Will he leaves a charitable legacy of £60,000 to St Leonard’s Hospice, York and the remainder of his estate to his sister.

The baseline amount is calculated as follows:                                 

The 10% test requires that the amount which is donated to charity must be at least 10% of the baseline amount. For Frank’s estate, the legacy of £60,000 is more than 10% of the baseline amount of £575,000 (which would be £57,500) and so the estate qualifies for the reduced rate of inheritance tax.

The reduced inheritance tax rate will result in a tax bill of £185,400 (£515,000 at 36%) rather than £206,000 (£515,000 at 40%), producing a considerable tax saving of £20,600 for Frank’s estate.

This also demonstrates that you do not need to leave 10% of the total estate to charity, just 10% of the baseline amount which is a lower figure.

The calculation is not always straightforward and so if you are thinking of making a new Will or changing your existing Will it is important to seek expert advice so that the Will can be drafted to ensure that you qualify for the reduced rate of inheritance tax. 

York Office

Wetherby Office

For more information on charitable giving or any enquiries regarding private client law, please contact our team on York 01904 716000 , Wetherby 01937 583210  or Malton 01653 692247  or email law@warekay.co.uk to see how we can assist.