Inheritance tax: your relatives can benefit from a reduced tax rate | Personal finance | Finance
Currently the tax free abatement is £325,000 and is known as the zero rate bracket and if the value of an estate is less than this then no tax is paid on it. If the value is above the threshold, the standard tax rate is 40%, unless the assets are bequeathed to charity. Gifts and donations to qualifying charities are exempt from estate tax and if a person leaves 10% or more of their net estate to charity, the rate of estate tax payable is reduced at 36%.
Along with this, the value of the charitable donations themselves are deducted before the imposition of inheritance tax.
This means that, in some scenarios, giving more to charity could actually lower a person’s inheritance tax bill and may mean that people have a little more to leave to their beneficiaries overall.
However, this depends on the initial value of the estate, as well as the size of the gift.
According to the rules, donations to charities are exempt as long as they are given directly to a charity which they qualify as a charity under UK law or which is established in the EU or another specified country .
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The charity must also be regulated in the country where it was established and it must be managed by “competent and competent persons”.
Choices of gifts a person can leave to charity include a pecuniary inheritance, which is a fixed amount of cash, or a specific inheritance which is a particular item, such as property or shares.
A person can also leave a residual inheritance which is all or part of what remains in the estate after everything else has been paid, such as other gifts, taxes and expenses.
The advice for people donating to charity is to clearly state their wishes in their will and include details such as the charity’s name, address and registration number.
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Claire Roberts, tax associate at accounting firm Moore Kingston Smith, said: “The choice to donate to charity in life or death depends on personal circumstances.
“Lifetime gifts qualify for Gift Aid and have the added benefit of reducing the value of your estate for IHT purposes.
“However, leaving charitable donations in your will could give you the assurance that you are helping a good cause while still having sufficient funds to enjoy in your retirement.”
Ms Roberts pointed out that as Chancellor Rishi Sunak has frozen the threshold at £325,000 until April 2026 and the cost of assets is rising, more and more people will be drawn into the inheritance net.
Ms Roberts added: ‘The generous IHT breaks on offer for charitable giving should not be overlooked when writing wills and planning for the future.’
According to projections by the Office for Budget Responsibility, the government will collect £37billion in inheritance tax over the next five years.
This is a 36% increase on the last five years when £27.2bn was raised.
Five years ago inheritance tax rose by an annual amount of £4.8 billion, five years from now it is estimated to be £8.3 billion.
There are other ways to reduce the level of inheritance tax a person pays. These include giving away money and assets while a person is still alive or placing assets in a trust and buying life insurance.
Also, if a person leaves anything above the threshold of their estate to their spouse, civil partner, or amateur sports club, the inheritance is generally not paid.
Being married or in a civil partnership certainly helps pay inheritance tax as if a person had an estate worth less than the threshold then on death the unused threshold can be added to the surviving partner’s threshold upon his death.
This means their threshold could rise to a maximum of £950,000.