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Giving with added will power

25 October 2013

When you think 'giving', it pays also to think 'tax'. Mike Truman explains the benefits available.


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 Gift Aid.

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 leave legacies?

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 Taxation.

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