Deciding on your will and legacy is an important choice to make. After all, we only get to decide once how we pass on our wealth for when we're no longer around. It may not be the most cheerful subject, but it's very important to make sure your legacy is planned for.
So this week, we’re taking a closer look at legacy planning – in particular, leaving a legacy gift to charities in your will. Niche's Managing Director and Chartered Financial Planner Matt Wiltshire will be lending his insight into why it may be a good idea to think about leaving a gift in your will.
Why would you leave a legacy gift to a charity?
There are two main reasons why you may consider leaving a legacy gift to a charity: first and foremost, it's generosity. But secondly, leaving gifts provides some inheritance tax benefits.
It’s true that charities can sit at the heart of society, and they just couldn’t do what they do without the generosity of people like you and the communities around you. We as a business do our own bit to help support local charities, and you may do things in your own way.
But one method is to leave gifts to charities in your will.
“Last year in 2019, people left around £3 billion to charities in their wills. That shows just how popular this method of giving and legacy gifting is for people, but also how important it is as a funding lifeline for charities big and small”, said Matt.
So, how can these gifts produce tax benefits?
The Benefits of Legacy Gifts to Charities
“Aside from the benefits of contributing to a great cause, with good planning you could also reduce or eliminate your inheritance tax bill."
It’s worth noting that not everyone will have to pay inheritance tax, as it’s only relevant to those with an estate over the tax-free threshold of £325,000.
But for estates over this threshold, you would be taxed at 40% of the remaining amount. For example, if your estate was worth £425,000, then the £100,000 (£425k - £325k = £100k) would be liable for taxation at 40%. This £100,000 is what we call a ‘net estate’. In other words, there would be a bill of £40,000 for the net estate (40%/£100k = 40k).
“This would leave you with £60,000 from your net estate to actually go to your partner, family, and other loved ones. But by leaving money to one charity, or a series of different charities in your will, you would be able to reduce the inheritance tax bill from 40% to 36%. It may not sound like a lot, but it can make quite a substantive difference", Matt noted.
"To do this, you would need to leave at least 10% of your ‘net estate’ - which is that bit over your tax-free threshold - to a charity of your choice”.
If this person in question gave 10% of their net estate to a charity, which would be £10,000, only 36% of the new net value would be payable in inheritance tax. So only £90,000 would be liable, leaving a new bill of £32,400.
“While this means that you may leave your partner or loved ones with a smaller amount, 76% of the gift is reduced from the tax bill (£7,600). So they’re receiving less, but actually, it’s a larger proportion of the new net estate.”
“You would pass on £57,600 instead of £60,000 – only £2,400 less – of your net estate while also giving a sizeable amount to charity”, says Matt.
It is worth considering, however, that not all cases and calculations of inheritance tax are quite as simple as this, so it is always worth talking to a regulated independent financial adviser about your options.
Legacy gifts to charities are just one part of legacy planning that we should consider when planning for the future. After all, we can only do it once, so you want to get it right. It's not just about our loved ones, but it's also a way of giving back to charities who can play a fantastic role in communities.
In this spotlight, thanks to some help from Matt, we’ve delved a little more into the specifics of what it means to you and a possible inheritance tax bill. Through a very basic example, we’ve shown what a 10% legacy gift to a charity would mean to your overall bill, and what you would then be able to gift to your family.
If you would like to find out more information about leaving legacy gifts to charities, or have any questions at all, please don’t hesitate to get in touch.
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Disclaimer: This article does not constitute financial advice. All information was correct at the time of writing.