Inheritance tax is particularly unpopular says Robert Jenrick
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Inheritance tax (IHT) is currently set at 40 percent on the value of a person’s estate above a particular threshold when they pass away. Legally avoiding this levy is likely to be a key aim for many Britons hoping to pass down money or assets to their loved ones. One of the ways a person may be able to knock down their IHT bill is through charitable gifts, with legacies accounting for 16 percent of all fundraised income for charities.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, provided insight on the matter.
She said: “Legacies are a lifeline for charities, and by leaving money in your will, you won’t just get a warm glow from helping a good cause, you’ll also get a boost from knowing you could cut your inheritance tax bill too.
“There are just certain steps you need to take to avoid the pitfalls of legacy giving.
“The pandemic dealt a triple blow: charities needed to help more people, they were able to raise less cash through events and charity shops, and delays in probate meant less legacy income.
“Since the beginning of this year, legacy income is thought to have recovered.
“Tragically, this is partly because more people have passed away, but also because long delays in the probate process have started to unwind.”
However, the act of legacy giving can end up being a win-win situation for both charities and those making gifts.
Those gifting to charity will see the sum fall out of their estate for Inheritance Tax purposes.
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This means the part of a person’s estate potentially liable for tax will be reduced.
Ms Coles continued: “If you leave at least 10 percent of your estate to charity (after exemptions), the rate of Inheritance Tax payable on any part of your estate outside your allowances falls from 40 percent to 36 percent.
“This won’t save money overall, but will ensure a charity you care about gets the money rather than the taxman.”
But Ms Coles also urged caution with this kind of action, given the fact that circumstances can change.
Leaving a fixed sum to charity, for example, may create issues if a person sees an income drop after they have written their Will.
To surmount this issue, individuals can specify a specific percentage of their estate goes to charity.
Otherwise, they could lay out specific bequests to family before leaving the remainder of their estate to charity.
This second action, however, could be impacted by rising house prices, as individuals may be left giving more than they originally intended.
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Finally, it will be important to keep families in the loop when it comes to decision making about charity giving.
Some family members may be expecting more of a financial legacy left behind after a person passes away.
If they ultimately receive less due to a charity gift, this could cause problems and distress unnecessarily.
There will be no Inheritance Tax to pay if everything above the threshold – usually £325,000 – is given to charity.
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