Charitable giving in a Will

[mc2fool]

The reduced IHT rate also can make charitable giving more tax efficient if done in a Will than done when you are alive, which I think is very perverse, but maybe charities benefit overall from the measure.

Whilst alive you can receive a tax benefit via Gift-Aid. After death there can be an IHT saving. Which is better would depend on your individual tax situation, I would have thought.

Actually you don't get any tax benefit via Gift-Aid, it's the charity that does by (effectively) receiving your donation gross of tax.

It may appear that you get a tax benefit if you're a higher rate taxpayer, 'cos you get money back (in the form of a reduction of taxes) but actually it's just a balancing to make your donation gross.

E.g. you give £100 to a charity and they claim Gift Aid to make your donation £125. As an HRT you claim back £25.00 (£125 x 20%), which makes it appear that you paid just £75 (£100 less the £25) for the charity to get £125. But that £75 is out of your net income, which (at 40%) you'd have to have earned £125 gross to get. So, after all that, the benefit is solely that the charity gets your donation gross.

Bequests to charities are also made gross (of IHT in that case), so there's no difference to them for that, per se, but the 10% rule means that it can also be a benefit to you (well, your estate and beneficiaries).

Having been through the process of submitting tax returns a good few times, the procedure, as I see it, is that your basic rate of tax is increased by the amount of gift aid claimed by the charity, so giving you relief from Higher Rate Tax on your donations.

It might be worth looking at HMRC's calculations in this respect.

TJH

In your self assessment your basic rate tax band is increased, but yes, that's correct. That's how HMRC implements what I said above.

"Example: You donate £100 to charity - they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%)." https://www.gov.uk/donating-to-charity/gift-aid

[hiriskpaul]

Comparison with gift aid can get very complicated.

Yes, while the two, Gift Aid and IHT re charitable donations, are straightforward in themselves, well done for elucidating on their interaction in respect of reducing (or not) the size of the estate.

A couple of tangential things to add. Firstly, not sure if you intended it but your OP seems to imply that the purpose of leaving 10% to charity would be to get the reduced rate of IHT. Well, unless I'm missing something, if that were the sole reason for doing so then, as the 10% is of the whole net estate whereas the IHT (reduced a tenth from 40% to 36%) is applied on the estate over £325K (simple case, no dependents/descendants). So the tax saving will always be less than the cost of the 10% donation.

That is not how it works. If someone has an estate valued at £326k and a £325k nil rate band, then £1k is chargeable to IHT at 40%. If £100 or more is given to charity the IHT rate is 36%.

The purpose of leaving 10% to charity is not solely to obtain the lower rate of IHT. The best outcome for your non-charitable beneficiaries is to leave nothing to charity. But given the fact that you have already decided to leave money to charity it is worth being cognisant of the lower rate of IHT. If you leave 4% of the chargeable estate to charity, your beneficiaries receive the same amount as if you had left 10% to charity. If you leave more than 4% but less than 10% your beneficiaries are worse off, so you may as well leave at least 10%. To illustrate, here are the outcomes for various charitable legacies from a £1k chargeable estate:

Charity  Residual estate
£0       £600
£10      £594
£20      £588
£30      £582
£40      £576
£50      £570
£60      £564
£90      £546
£100     £576
£125     £560
£150     £544

If you were prepared to leave £90 to charity from a £1k chargeable estate, you may as well make it £150!

The other thing, as Dod mentioned re Gift Aid, is that you can only Gift Aid up to the grossed up amount of tax you've paid, and if you think of that in comparison to the 10%, most people will get there pretty quickly after exceeding the £325K allowance. Even with a modest estate of £500K, 10% of that is £50K and were you wanting to Gift Aid the equivalent instead (£40K + £10k GIft Aid) that'd take you (a bit) into the higher rate tax band to pay the £10K tax. While that might not be an issue for many people working, amongst retired folks asset-rich-income-(relatively)poor is much more common and, esp. with house price inflation, it's likely to take most pensioners many years to make a 10% of assets equivalent set of Gift Aidable donations

It is immensely difficult to optimise this ahead of time. Perhaps if someone is in their 90s and already leaving over 10% to charity in their Will, they might want to consider adding any new gifts into their Will rather than claiming gift aid. Again, not easy.

[mc2fool]

Comparison with gift aid can get very complicated.

Yes, while the two, Gift Aid and IHT re charitable donations, are straightforward in themselves, well done for elucidating on their interaction in respect of reducing (or not) the size of the estate.

A couple of tangential things to add. Firstly, not sure if you intended it but your OP seems to imply that the purpose of leaving 10% to charity would be to get the reduced rate of IHT. Well, unless I'm missing something, if that were the sole reason for doing so then, as the 10% is of the whole net estate whereas the IHT (reduced a tenth from 40% to 36%) is applied on the estate over £325K (simple case, no dependents/descendants). So the tax saving will always be less than the cost of the 10% donation.

That is not how it works. If someone has an estate valued at £326k and a £325k nil rate band, then £1k is chargeable to IHT at 40%. If £100 or more is given to charity the IHT rate is 36%.

Good if so but are you sure? That's not the way I read it.

"The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)" https://www.gov.uk/inheritance-tax

The other thing, as Dod mentioned re Gift Aid, is that you can only Gift Aid up to the grossed up amount of tax you've paid, and if you think of that in comparison to the 10%, most people will get there pretty quickly after exceeding the £325K allowance. Even with a modest estate of £500K, 10% of that is £50K and were you wanting to Gift Aid the equivalent instead (£40K + £10k GIft Aid) that'd take you (a bit) into the higher rate tax band to pay the £10K tax. While that might not be an issue for many people working, amongst retired folks asset-rich-income-(relatively)poor is much more common and, esp. with house price inflation, it's likely to take most pensioners many years to make a 10% of assets equivalent set of Gift Aidable donations

It is immensely difficult to optimise this ahead of time. Perhaps if someone is in their 90s and already leaving over 10% to charity in their Will, they might want to consider adding any new gifts into their Will rather than claiming gift aid. Again, not easy.

Well, I don't know about immensely difficult but agreed on not easy.

[hiriskpaul]

Comparison with gift aid can get very complicated.

Yes, while the two, Gift Aid and IHT re charitable donations, are straightforward in themselves, well done for elucidating on their interaction in respect of reducing (or not) the size of the estate.

A couple of tangential things to add. Firstly, not sure if you intended it but your OP seems to imply that the purpose of leaving 10% to charity would be to get the reduced rate of IHT. Well, unless I'm missing something, if that were the sole reason for doing so then, as the 10% is of the whole net estate whereas the IHT (reduced a tenth from 40% to 36%) is applied on the estate over £325K (simple case, no dependents/descendants). So the tax saving will always be less than the cost of the 10% donation.

That is not how it works. If someone has an estate valued at £326k and a £325k nil rate band, then £1k is chargeable to IHT at 40%. If £100 or more is given to charity the IHT rate is 36%.

Good if so but are you sure? That's not the way I read it.

"The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)" https://www.gov.uk/inheritance-tax

How very misleading of them.

You can verify it using the HMRC calculator here: http://www.hmrc.gov.uk/tools/iht-reduce ... ulator.htm

Inheritance Tax reduced rate calculator results

Component

Value of component after deductions:£326,000.00
Value of component minus donation to charity:£325,900.00
Inheritance Tax nil rate band applied:£325,000.00
Value of component minus Inheritance Tax nil rate band:£1,000.00
Minimum charitable donation to meet the ten per cent test:£100.00
Minimum charity donation required:£100.00

£100.00 is the minimum charity donation required for this component to qualify for the reduced rate of Inheritance Tax.

You told us:
Inheritance Tax nil rate band: £325,000.00
Value of gifts made before death that are subject to Inheritance Tax: £0.00
Total value of assets in component: £326,000.00
Debts and liabilities: £0.00
Inheritance Tax relief: £0.00
Other Inheritance Tax exemptions: £0.00
Donation to charity: £0.00
Net value of all other components or parts of the estate: £0.00

[mc2fool]

"The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)" https://www.gov.uk/inheritance-tax

How very misleading of them.

You can verify it using the HMRC calculator here: http://www.hmrc.gov.uk/tools/iht-reduce ... ulator.htm

Misleading indeed! I did took a look at the calculator but couldn't figure what "components" were, and the help didn't help!

[chas49]

Just in case it isn't clear, the "Minimum charitable donation to meet the ten per cent test" is just 10% of the chargeable estate. It's £100 in the case of the £1000 estate example. It would be £5 on a £50 chargeable estate, and £2000 on £2000 etc....

(tested on the calculator!)

[mc2fool]

Just in case it isn't clear, the "Minimum charitable donation to meet the ten per cent test" is just 10% of the chargeable estate. It's £100 in the case of the £1000 estate example. It would be £5 on a £50 chargeable estate, and £2000 on £2000 etc....

(tested on the calculator!)

From https://www.gov.uk/inheritance-tax it isn't at all clear! However...

"The charitable giving condition is set out in IHTA84/Sch1A/Para 2(2). In order to qualify for the lower rate; the donated amount must be at least 10% of the baseline amount.
:
The calculation for the ‘baseline amount’ is set out in IHTA84/Sch1A/Para 5 (IHTM45009) and is, broadly, the value transferred by a chargeable transfer (IHTM04027), but after adding back the amount that qualifies for charity exemption. "
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm45002

The Reduced rate for charitable gifts section of the HMRC Inheritance Manual has lots of sub-sections, including on components and the various quirks around calculating the baseline amount and is far more than I'm interested in, but may be of interest to others (the whole caboodle looks a lot more complicated than it initially seemed!).

For a simple no complications or quirks example, this is pretty clear: https://www.hilldickinson.com/insights/articles/reduce-inheritance-tax-leaving-gift-charity

[hiriskpaul]

"The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)" https://www.gov.uk/inheritance-tax

How very misleading of them.

You can verify it using the HMRC calculator here: http://www.hmrc.gov.uk/tools/iht-reduce ... ulator.htm

Misleading indeed! I did took a look at the calculator but couldn't figure what "components" were, and the help didn't help!

Components introduce extra complications. An estate is divded into multiple components when calculating IHT. These are failed PETs, property/assets passed by survivorship, the general estate and I think maybe one other that I cannot remember (something to do with trusts?). For simple estates everything falls into the general component and if not, I think the PRs can combine components when working out the amount left to charity. IHT calculations can get very involved.

[yorkshirelad1]

There was an item in the Telegraph a couple of weeks ago, which I've been meaning to add to this, but only just got round to this. It concerns whether gifts to charity are calculated before IHT is paid or after IHT is paid. This may not be news to those in the legal profession but as a layperson, it's news to me, and I think I'm tempted to put an explicit mention in my will to save my exors the hassle (or contest) or which I intended. I believe the terminology is to do with judgement re Benham or re Ratcliffe. Here's the article from the Telegraph (of 25 Feb 2023)

https://www.telegraph.co.uk/tax/inheritance/inheritance-tax-trap-leaves-families-owing-thousands-pounds/ (possible paywall)
http://archive.today/2023.02.21-202317/https://www.telegraph.co.uk/tax/inheritance/inheritance-tax-trap-leaves-families-owing-thousands-pounds/ (no paywall)

The info that made me sit up and take note was
https://communities.lawsociety.org.uk/november-2019/charity-case/6000508.article

“Note that the wording of most professionally drafted wills – which directs that estates should be divided after payment of debts, funeral expenses and taxes, including IHT – is insufficient to be a Benham construction”

[Dod101]

Comparison with gift aid can get very complicated.

Yes, while the two, Gift Aid and IHT re charitable donations, are straightforward in themselves, well done for elucidating on their interaction in respect of reducing (or not) the size of the estate.

A couple of tangential things to add. Firstly, not sure if you intended it but your OP seems to imply that the purpose of leaving 10% to charity would be to get the reduced rate of IHT. Well, unless I'm missing something, if that were the sole reason for doing so then, as the 10% is of the whole net estate whereas the IHT (reduced a tenth from 40% to 36%) is applied on the estate over £325K (simple case, no dependents/descendants). So the tax saving will always be less than the cost of the 10% donation.

That is not how it works. If someone has an estate valued at £326k and a £325k nil rate band, then £1k is chargeable to IHT at 40%. If £100 or more is given to charity the IHT rate is 36%.

Good if so but are you sure? That's not the way I read it.

"The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)" https://www.gov.uk/inheritance-tax

The other thing, as Dod mentioned re Gift Aid, is that you can only Gift Aid up to the grossed up amount of tax you've paid, and if you think of that in comparison to the 10%, most people will get there pretty quickly after exceeding the £325K allowance. Even with a modest estate of £500K, 10% of that is £50K and were you wanting to Gift Aid the equivalent instead (£40K + £10k GIft Aid) that'd take you (a bit) into the higher rate tax band to pay the £10K tax. While that might not be an issue for many people working, amongst retired folks asset-rich-income-(relatively)poor is much more common and, esp. with house price inflation, it's likely to take most pensioners many years to make a 10% of assets equivalent set of Gift Aidable donations

It is immensely difficult to optimise this ahead of time. Perhaps if someone is in their 90s and already leaving over 10% to charity in their Will, they might want to consider adding any new gifts into their Will rather than claiming gift aid. Again, not easy.

Well, I don't know about immensely difficult but agreed on not easy.

Two matters from this. For the test of leaving at least 10% of the net value of the estate to charity (as mc2fool mentions) it is at least 10% of the chargeable estate, at least that’s what I was told. That is not the estate’s total value minus any debts, but after deduction of the NRB and possible other items like the allowance for a house left to a descendant and even a deceased spouses’ unused NRB (if any)

The other point is re Gift Aid. It is not that you are not allowed to give Gift Aid over the amount of tax that you have paid; you can give as much as you like that way, but the point is that if you Gift Aid more such that you are allowing the charity to claim more tax than you have paid, HMRC will claim it back from the (non) taxpayer. I know, it happened to me a couple of years ago. I pay so little tax that I have cancelled all my Gift Aid Declarations. The charities lose out but that is too bad.

Dod