Charitable Giving and Estate Planning

Estate planning is the process of arranging suitable management and/or disposal of assets in preparation for death. Efficient tax planning during both life and in death (via a Will) can reduce possible liability to income tax, capital gains tax and inheritance tax where appropriate.

There are various ways that estate planning can take place. It is important that suitable legal and tax advice is obtained prior to either any disposal or management of assets. This is to ensure that the estate planning is efficient and suitable to your needs. It is also important to maintain the standard of living that you are used to, rather than to dispose of assets in order to possibly avoid paying tax upon death. The best route to take will, therefore, depend on personal circumstances and assets within the estate.

Charitable giving

An attractive form of estate planning is via charitable giving. This is because legislation has been designed to encourage giving to charities, which in turn qualifies for tax relief. To qualify, the charitable giving must be to a registered charity which is established for charitable purposes only and is managed by proper persons. The Charity Commission has an online charity register which can be used to research and confirm the status of charities. Another benefit of charitable giving is that you also benefit your chosen charity with much needed funds.

Charitable giving can be achieved via both lifetime giving and upon death. The gifts must be made outright to the registered charity. By making lifetime charitable gifts, this will reduce your estate assessable to inheritance tax upon death and makes use of the charitable exemption i.e. passing tax free to the charity. It is also likely that income tax relief and/or corporation tax relief and/or capital gain tax relief may be obtained depending on the type of disposal and gift made to the registered charity.

Understanding inheritance tax

Upon death, each individual has the availability of a Nil Rate Band which is taxed at 0%. For some estates, there is also the availability of a Residence Nil Rate band which is also taxed at 0%. Should the estate exceed the aforementioned bands, it may be a taxable estate for inheritance tax purposes. If the estate is liable to inheritance tax, the inheritance tax rate is charged at 40%. However, by including charitable giving within a Will, it may be possible to claim the reduced inheritance tax rate of 36%. This can be achieved if 10% of the estate is left to charity (subject to HMRC approval).

By including charitable giving in a Will, this also has the benefit of the charitable exemption for inheritance tax i.e. passing tax free and reducing your estate before inheritance tax is calculated. This can, therefore, reduce the amount of inheritance tax that is payable upon death. By achieving the reduced inheritance tax rate of 36%, the beneficiaries in the will i.e. the charity(ies) and other beneficiaries will receive more. Charitable giving can be included in a Will via either fixed legacies i.e. cash sums or shares of your estate being left the charity.

It is important to note that, whilst testamentary freedom exists in England and Wales, i.e. you can leave your estate to whomever you wish, it is equally important to consider any challenges against your estate from people who feel that they should have been reasonably provided for. If you do not consider this, you may open your estate up to challenge and result in costs being incurred by your estate in defending the claim, which may undo any inheritance tax saving achieved by the charitable giving.

It is therefore important that appropriate advice is taken with regard to estate planning decisions such as this, to understand the risks and benefits.

Frequently Asked Questions

What is estate planning and why is it important?

Estate planning is the process of organising how your assets will be managed or distributed during your lifetime and after death. It helps ensure your wishes are followed and can mitigate tax liabilities such as inheritance tax.

How does charitable giving reduce inheritance tax?

Gifts made to registered charities are exempt from inheritance tax. Additionally, if you leave at least 10% of your estate to charity, you may qualify for a reduced inheritance tax rate of 36%, which can increase what your beneficiaries ultimately receive.

Can I make charitable gifts both during my lifetime and through my Will?

Yes. Charitable donations can be made at any time. Lifetime gifts may reduce your future estate and often qualify for income tax or capital gains tax relief, while gifts in your Will reduce your estate’s value for inheritance tax purposes.

Do I need to donate to a specific type of charity to receive tax benefits?

To qualify for tax relief, donations must be made directly to a registered charity that is listed on the Charity Commission register and meets the criteria for recognised charitable status.

What forms can charitable gifts take in a Will?

Common options include leaving a fixed cash amount or a percentage share of your estate. Both types of gifts pass tax‑free to the charity and may help reduce the overall inheritance tax payable.

Examples

Example A

Leaving a percentage to charity to reduce inheritance tax

Mr Watson has an estate worth £900,000. After allowances, £500,000 is subject to inheritance tax. He wants to leave something to charity but also ensure his children receive most of his estate. By leaving 10% of his taxable estate to charity, he qualifies for the reduced 36% inheritance tax rate instead of 40%, and thus increases the amount of his estate that passes to his chosen beneficiaries.