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Charitable gifts in Will drafting and estate administration

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By Madeleine Beresford

Leaving money to a charity in a Will is a great way to leave a lasting legacy for a cause particularly close to your heart, and reduce the Inheritance Tax your estate will be subject to on your death at the same time. 

Types of charitable giving in Wills

Cash Gift - Leaving a gift of a cash amount is the simplest way of leaving a gift to charity. However, this can be problematic if you are unlikely to be able to predict how such a gift will compare with the size of your estate on your death. 

On the one hand, inflation may mean that the gift makes up a smaller proportion of your estate than intended (although this can be countered by linking the legacy to the Retail or Consumer Prices Index). On the other hand, if the estate is substantially diminished compared with when you make your Will (for example, due to paying care costs) the gift may make up a larger proportion than intended, especially because a cash gift takes priority over the residuary beneficiaries. For this, you can also leave cash gifts to the residuary beneficiaries, so that if the estate is insufficient to pay all of the cash gifts in full, the cash gifts then each reduce proportionately. 

Gift of a proportion of your estate - Alternatively, by leaving a fixed percentage of your estate to a charity, this ensures you give the proportion you intend, whether larger or smaller than the sum you have in mind at the time you are making your Will. A minimum and maximum sum can be specified, to keep the gift within the parameters intended. 

Inheritance Tax - UK registered charities are exempt from Inheritance Tax. In addition, depending on the proportion you leave, the  taxable part of your estate may qualify for a reduced rate of Inheritance Tax. 

You may have heard that in giving 10% of an estate to charity, it will qualify for a reduced rate of Inheritance Tax at 36% compared with 40%. This is a more generous provision than it first seems, as in order to qualify for the reduced rate, it is 10% of the taxable estate rather than 10% of the entire estate.

This taxable amount is calculated, in simple terms, by deducting your available tax free allowances from the net estate at date of death. This means that an estate worth £700,000, with two nil-rate bands of £325,000 available, would have a taxable estate of £50,000, and therefore the 10% would be satisfied if at least £5,000 is passing to charity.

Depending on the size of the estate, even a comparatively small legacy can mean the estate qualifies for the reduced rate of Inheritance Tax.

If you would like to review your Will in light of introducing or extending charitable gifts in your Will, please contact a member of the Private Client team in your local TWM office.

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