Many people like to leave a gift to charity in their Will by way of a legacy which not only benefits the charity but also has tax benefits for the donor.
When an estate is valued at greater at £325,000 or more it becomes liable for Inheritance Tax, which is charged at 40%.
By leaving a gift to charity it is possible to reduce the amount of inheritance tax paid on the chargeable part of the estate.
Bequeathing a specific gift to a charity, such as a certain asset or amount of money, means the financial value of the gift will not be included when calculating the inheritance tax on the estate.
For example, by leaving £10,000 to charity, not only will the charity benefit, the estate will have reduced its liability by £10,000 potentially saving £4,000.
If you wish to make a sizable donation to charity through a legacy, by leaving 10% of your ‘net value’ (this will be dependent on circumstances such as being married and gifts made during a lifetime), the amount of tax liable will be reduced from 40% to 36%.
It is also possible to nominate a specific purpose for any legacy you leave by including a wish on how the money should be used. In such cases care should be taken in the drafting. If the purpose of the legacy is too restrictive, the charity may be unable to use it, meaning they have to apply to the Charity Commission to allow the money to be used for other purposes.
Inheritance Tax calculations and estate planning can be quite complicated and it is recommended that you discuss your circumstances with an expert. They will be able to advise you on potential issues, such as a family member contesting the legacy if they feel they have not been reasonably provided for, particularly if they have been financially dependent on you.
They may also contest on basis that they feel the legacy was written under undue influence or that you were not of sound of mind whilst making the gift. This could leave the gift or even the entire Will being declared invalid.