Will IHT be lower if you leave money to charity?

Gifts to charities are already exempt from inheritance tax (IHT), but if the gift is worth 10% of your estate or more, then your overall rate of IHT will reduce from 40% to 36%.

In this blog, Vicki Gulliver, Head of the Probate team at Lodders, explains the impact of charitable donations on inheritance tax (IHT), and how this can be an option even after death.

What is IHT?

IHT is a tax on the estate of someone who has died, including all their property, possessions and money. With a standard tax rate of 40% of anything over the nil-rate band threshold, which currently stands at £325,000, it can have a sizeable impact on what you leave behind for loved ones.

There are a number of steps you can take to minimise the impact of IHT on your estate, such as making a charitable donation in your will.

The impact of charity donations on IHT

Recent data suggests that over 38,000 charitable estates were found in wills in 2023 – the highest number recorded since tracking sector data in 2012.

If you choose to make a donation to charity in your will, this donation will either:

• be taken off the value of your estate before IHT is calculated
• reduce your IHT rate to 36%, if 10% or more of your chargeable estate is left to charity

There are several different ways you can leave a charitable donation in your will, from leaving a specific sum of money, a percentage of your estate, or an asset such as a property. In order to claim the 36% rate of IHT, the amount going to charity must equate to at least 10% of your overall chargeable estate, which is the value after the nil rate band and any other reliefs and exemptions have been applied.

Charitable donations are only valid if they are gifted to a qualifying charity; this is an organisation that is registered as a charity for tax purposes by HMRC.

Options after death

It is possible to take advantage of the lower IHT rate even after death through a Deed of Variation.

This is a legal document that can be prepared after death and allows the distribution of the estate to be altered by the named beneficiaries in the will. This means that named beneficiaries can re-direct 10% of the chargeable estate to charity, providing all those due to receive the inheritance are in agreement.

There are a number of other reasons why a Deed of Variation may be required, in addition to reducing the amount of IHT payable. These include:

1. A change to the value being distributed
2. Changes to the recipients of the distribution
3. Providing for someone who was left out of the Will or would otherwise not have inherited under the rules of Intestacy (if there was no Will)
4. To reduce the amount of Capital Gains Tax (CGT) payable
5. To clear up any uncertainty over the will

The Deed of Variation must be prepared within two years from the date of death in order to be effective for IHT and CGT purposes and while it doesn’t have to be a formal document it must meet several conditions. 

How we can help

To ensure your will is drafted correctly to take advantage of the reduced IHT rate, we strongly advise you to use an experienced legal adviser.

Lodders’ Probate team is always happy to provide support whether it is creating a will, preparing IHT returns, advising on deeds of variation or more.

For expert advice and guidance on charitable donations and IHT, please get in touch.