Many people leave a gift in their will to a charity. Apart from being a generous gift, it may have a positive impact on the estate of the testator i.e. the individual making the will.
Most individuals in the UK have an inheritance tax allowance of £325,000 (the nil rate band). When an individual dies, the assets of their estate are added together, and any balance in excess of the nil rate band is subject to inheritance tax at 40%. The two main tax exemptions are gifts to a registered charity and gifts to a spouse or civil partner. Where a widow or widower has died, and the estate of their late spouse or civil partner was tax exempt, then in most cases, the estate of the survivor can claim up to two nil rate band allowances before inheritance tax becomes chargeable. This is calculated by reference to the nil rate band in force on the survivor’s death, and currently amounts to £650,000.
A charity registered in the UK is exempt from paying inheritance tax under s23 Inheritance Tax Act 1984. A testator can leave a gift to charity through their will in three ways;
A Specific Gift
A specific gift is where a person leaves a particular gift of an item they own in their will. The gift can be a small item such as a piece of jewellery or a can be a gift of land or a house.
By leaving a specific gift to a charity in a will, the value of the item will not form part of the testator’s chargeable estate for inheritance tax purposes.
However, a testator must be aware that the gift will fail if they no longer own that specific item at the time of death.
A Pecuniary Legacy
A pecuniary legacy is a gift of a sum of money. Leaving a pecuniary legacy in a will has the same benefit of leaving a specific gift in that, the value of the legacy will not form part of the testator’s chargeable estate for inheritance tax purposes.
A Residuary Gift
The residue of an estate is the balance of the testator’s estate after the legacies, debts and expenses, such as the funeral costs, have been settled.
A testator may choose to leave a percentage of their estate to charity or the full residue. If the testator leaves the full residue of his estate to charity then, as long as the legacies do not exceed the inheritance tax allowance, the estate will be exempt from inheritance tax.
If a testator leaves a percentage of his estate to charity then this percentage will be exempt. If a testator leaves a minimum of 10% of their chargeable estate to charity, this will have the effect of reducing the inheritance tax charge from 40% to 36%. The chargeable estate is calculated after deduction of the inheritance tax exemptions such as the nil rate band or spouse exemption.