IF YOU were thinking of making a gift to your local church,
cathedral, or another charitable cause, would you know how to do so
tax efficiently? The type of gift that could be most tax-efficient
may surprise you.
Many churchgoers will be familiar with the income-tax relief
that is available through Gift Aid for charitable donations: for
every £8 you give, the Government will pay a further £2 to the
charity. Less well known is the fact that higher-rate taxpayers can
reclaim a further £2 tax themselves on every £8 they give under
But what about leaving something in your will to charity? Did
you know that a legacy often makes more financial sense than a
gift, even though many more people make Gift Aid payments than
The organisation Remember a Charity encourages people to leave
such legacies. It says that, although 35 per cent of people claim
they would be prepared to leave something in their will to a
charity, once they had provided for their loved ones, only seven
per cent of people actually do.
The Government has always encouraged these gifts by making them
exempt from inheritancetax. Since this is charged at 40 per cent on
estates worth more than £325,000, the tax saving on legacies for
such donors is normally better than using Gift Aid during their
lifetime, if they are basic-rate taxpayers.
For higher-rate taxpayers, it was more evenly balanced, but
since April 2012 an even better deal has been offered to those who
leave at least ten per cent of their net estate to charity: the
remainder will be taxable at 36 per cent rather than40 per cent.
The "net estate" is the amount that would actually be liable to
tax; so it does not include the first £325,000, or anything left to
a spouse (which is exempt from the tax).
Unfortunately, the calculations can be extremely complicated. HM
Revenue and Customs (HMRC) admit as much in their guidance notes on
the subject, and recommend that readers use their online calculator
at www.hmrc.gov.uk/tools/iht-reduced-rate/calculator.htm to work
out whether they qualify.
The advantages can be considerable, however, particularly if an
intended legacy of less than ten per cent is increased so that it
qualifies the estate for the reduced rate. HMRC gives an example
where the will of someone with a £575,000 net estate leaves £50,000
to charity, and so does not qualify for the reduced rate. By
increasing the donation to £57,500, tax of £23,700 is saved - more
than three times the extra amount paid to the charity.
Has the new relief been effective? A solicitor with the London
law firm Wedlake Bell, Kate Davies, is sceptical. She says that
most people who expressed an interest in it were already intending
to leave some money to charity, although the new relief may mean
that they leave more.
"From our experience," she says, "new donors are not necessarily
encouraged to leave money to charity, and the increase is perhaps
not as much as was hoped. There is also the option for a will to be
varied after death to include or increase charitable legacies; but
we have not seen much of this in practice yet."
Drafting a will to meet the ten-per-cent rule can also prove
surprisingly complicated; so it is, perhaps, this last idea that
might prove the most fruitful. When executors and beneficiaries
find that, by increasing a legacy already left to charity by the
deceased, they can reduce the tax paid, and increase their own
inheritance, perhaps the idea will catch on.
Mike Truman is the editor of the magazine