What is Inheritance Tax?
Inheritance tax (IHT) is a UK tax on wealth passed on during life or at death, charged at up to 40% on amounts above certain tax-free thresholds.
Individuals can pass on £325,000 free of IHT, with an additional allowance of up to £175,000 when a main residence is left to direct descendants, potentially increasing the threshold to £500,000, or £1 million for married couples.
Despite these allowances, many estates still face IHT, but careful planning, including options such as charitable giving, can help reduce the liability.
Charitable giving
Charitable giving not only supports worthy causes, but it can also provide valuable tax benefits.
First, any bequests to registered charities will be exempt from IHT. Secondly, if your total charitable bequests amount to at least 10% of your net estate then the rate of tax on the rest of the estate is lowered from 40% to 36%.
This strategy is particularly effective for larger estates exceeding the standard IHT thresholds- £325,000 nil-rate band and the residence nil-rate band, if applicable.
Don’t forget regular gifting throughout your life. This can support your loved ones or charitable causes but also help manage your estate in a tax-efficient manner.
Make a lasting impact
Your chosen charity receives a substantial, tax-free legacy that significantly boosts its funding – many charities are now heavily reliant on this type of donation.
If you are going to do this, it’s a good idea to tell the recipient charities. If your gift is likely to be large in relation to their existing resources, then they can begin to make some plans on how to use your donation.
Many people will already have a charity that’s close to their hearts. However, if you aren’t sure who to donate to, you’ll need to give your choice some careful thought. One such resource is Giving is Great – a website which aims to help people understand charities better and find the most impactful causes.
Trade-offs
If not discussed in advance, a large charitable bequest could lead to disputes among beneficiaries who feel their inheritance is unfairly impacted – discuss it with them to avoid further problems down the line.
Open communication and clear, professionally drafted Wills are recommended.
Expert advice
Navigating the complexities of gifting and tax law requires expertise, consulting with a financial planner is recommended. If you would like some advice on your current situation, please get in touch.
Please remember, this content is provided for information purposes only. Investment involves risk. Past performance is not a guarantee or indication of future results. Investment return and the principal value of an investment may go up or down and may result in the loss of the amount originally invested. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability.
