With inheritance tax receipts surging month-on-month, experts are drawing attention to a little-known rule that could help families significantly reduce their tax bills while supporting charitable causes. Under current inheritance tax laws, estates valued above the £325,000 threshold are typically taxed at 40%. However, there is a way to lower this rate to 36% by making charitable donations through your will.
Paislei Godley, director and tax specialist at Prime Accountants Group, explains that this is one of the “quirky” rules within inheritance tax. She said: “If you give to charity in your will, that is generally exempt for inheritance tax purposes – but there is this additional rule that, if you leave a certain amount of your estate to charity, you can harness an extra tax saving.” Specifically, if you leave 10% or more of your net estate to charity, the rate of inheritance tax payable on the whole estate is reduced from 40% to 36%, making a 4% tax saving overall.
To benefit from this rule, the donation must be at least 10% of your net estate and must be given to a qualifying charity established in the UK and registered with HMRC.
The donation must also be specified clearly in your will, naming the charity and detailing the amount or asset being given. Importantly, the gift must be outright, with no conditions attached. For example, if you leave a property to a charity but stipulate that someone can live in it, this would not qualify for the tax reduction.
George Williamson, an inheritance expert at Level Group, highlights that many people are “unaware” that all gifts to these charities are entirely exempt from inheritance tax, regardless of the sum.
Such gifts are deducted from the estate’s net value, which could potentially lower the estate’s value below the £325,000 threshold, meaning no inheritance tax would be due.
However, if the estate remains above the threshold after the gift, the standard 40% rate applies unless the 10% rule is met, in which case the reduced 36% rate kicks in.
Mr Williamson also reiterated that to leave a charitable donation from your estate, you must have a will specifying your wishes, or beneficiaries can arrange a gift through a Deed of Variation.
However, he advised: “The process of leaving a donation to a charity or philanthropic cause can be quite complex to carry out, so we’d recommend seeking professional advice and a lawyer who can advise on the execution of such wishes.”
