There are many ways to give money to charity. Some like to set up direct debits each month, others prefer to make one-off donations or volunteer their time instead.

But another option is to leave part of your estate to charitable causes in your will — with the added bonus that it could slash thousands of pounds off the inheritance tax bill you leave your family.

Inheritance tax is charged on the value of your estate when you die. The first £325,000 is tax-free, but this rises to £500,000 if you pass your main home to a direct descendant (a child, grandchild or stepchild) as long as your estate is worth £2 million or less. After that you start to lose the extra allowance for your main home.

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Anything left to a spouse or civil partner is exempt and couples can pass on any unused allowances, giving them a total of up to £1 million to pass on tax-free.

The inheritance tax rate is 40 per cent, so if a surviving spouse with the full £1 million of allowances passed on an estate worth £2 million, the beneficiaries would pay £400,000 in tax — 40 per cent of £1 million. Here’s how leaving part of your estate to charity can help to reduce the bill.

Sweet charity

If you leave 10 per cent or more of the taxable value of your estate to charity (or to a community amateur sports club), the rate at which your estate pays tax drops from 40 to 36 per cent. This won’t increase the amount of money that goes to your beneficiaries, but it will decrease the amount that goes to the taxman.

When working out how much you need to leave to charity to trigger the lower tax rate, you need to look at the value of your estate after deducting any allowances, such as the £325,000 you can pass on tax-free (known as the nil-rate band) and the £175,000 extra you can pass on tax-free if you are leaving your home to a direct descendant (known as the residence nil-rate band).

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For example, if you were passing your £1 million estate to your niece, you would be able to pass on £325,000 of your estate tax-free. The remaining £675,000 would be taxed at 40 per cent, so your niece would pay a tax bill of £270,000 and inherit £730,000.

To qualify for the lower rate, you would need to give 10 per cent of your taxable estate (so £67,500) to charity. This means your niece would then pay 36 per cent tax on £607,500 — a £218,700 tax bill — and inherit £713,800.

Your £67,500 gift to charity has only cost your niece £16,200.

The nitty gritty

If your estate is worth £2 million or more, you begin to lose the residence nil-rate band. You lose £1 for every £2 you are over the threshold and it is completely lost if your estate is worth more than £2.35 million. If you have inherited your spouse or civil partner’s unused residence nil-rate band you will have lost both allowances if your estate is worth £2.7 million.

But while the gift to charity reduces the value of your taxable estate, HM Revenue & Customs doesn’t let people use this as a way to get around losing this allowance. Instead, it looks at the value of the estate before exemptions and charitable gifts.

For example, say your estate is worth £2.2 million and you are leaving it to your children. It is £200,000 over the residence nil-rate band, so you lose £100,000 of the £175,000 allowance. Giving a £200,000 gift to charity doesn’t change this fact, even though it brings your estate to the £2 million threshold.

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In this scenario, you can pass on £400,000 of your estate tax-free (the £325,000 nil-rate band plus the £75,000 of the residence nil-rate band that you haven’t lost). You are left with a taxable estate of £1.8 million, and your tax bill would be £720,000 if you didn’t make the gift to charity — 40 per cent of £1.8 million — and your beneficiaries would receive £1.48 million in total.

If you wanted to leave a gift to charity to get a lower tax rate, you would need to give at least £180,000, as this is 10 per cent of your £1.8 million taxable estate. Your beneficiaries would then pay 36 per cent tax on £1.62 million (a bill of £583,200) and get to keep £1,436,800.

How to do it

Set out clearly in your will the amount you want to leave to charity or community amateur sports club. You can choose specific charities yourself (if you do, it is best to include their registered charity number), or simply state the amount and let your executors decide where the money should go.

Your gift can be a cash sum, a particular property or asset or simply a proportion of your estate.

It’s worth checking with a solicitor that your will is valid, and leaving a letter of wishes alongside the legal documents that outlines and explains what you would like to happen to your estate. This letter can often help family members understand if the will is not what they expected.

If you want the charity to use your gift for a specific purpose, make sure you discuss this with the charity first. It may not be able to comply with your requests, and it could result in the charity rejecting the gift.

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