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. <\/p>\n
But another option is to leave part of your estate to charitable causes in your will \u2014 with the added bonus that it could slash thousands of pounds off the inheritance tax bill you leave your family.<\/p>\n
Inheritance tax is charged on the value of your estate when you die. The first \u00a3325,000 is tax-free, but this rises to \u00a3500,000 if you pass your main home to a direct descendant (a child, grandchild or stepchild) as long as your estate is worth \u00a32 million or less. After that you start to lose the extra allowance for your main home.<\/p>\n
\u2022 Visit the new and improved Times Money<\/a> for the latest personal finance news, guides and expert columnists <\/p>\n 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 \u00a31 million to pass on tax-free.<\/p>\n The inheritance tax rate is 40 per cent, so if a surviving spouse with the full \u00a31 million of allowances passed on an estate worth \u00a32 million, the beneficiaries would pay \u00a3400,000 in tax \u2014 40 per cent of \u00a31 million. Here\u2019s how leaving part of your estate to charity can help to reduce the bill.<\/p>\n Sweet charity<\/p>\n 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\u2019t increase the amount of money that goes to your beneficiaries, but it will decrease the amount that goes to the taxman. <\/p>\n 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 \u00a3325,000 you can pass on tax-free (known as the nil-rate band) and the \u00a3175,000 extra you can pass on tax-free if you are leaving your home to a direct descendant (known as the residence nil-rate band).<\/p>\n \u2022 Time is running out to use these valuable inheritance tax breaks<\/a><\/p>\n For example, if you were passing your \u00a31 million estate to your niece, you would be able to pass on \u00a3325,000 of your estate tax-free. The remaining \u00a3675,000 would be taxed at 40 per cent, so your niece would pay a tax bill of \u00a3270,000 and inherit \u00a3730,000.<\/p>\n To qualify for the lower rate, you would need to give 10 per cent of your taxable estate (so \u00a367,500) to charity. This means your niece would then pay 36 per cent tax on \u00a3607,500 \u2014 a \u00a3218,700 tax bill \u2014 and inherit \u00a3713,800.<\/p>\n Your \u00a367,500 gift to charity has only cost your niece \u00a316,200.<\/p>\n The nitty gritty<\/p>\n If your estate is worth \u00a32 million or more, you begin to lose the residence nil-rate band. You lose \u00a31 for every \u00a32 you are over the threshold and it is completely lost if your estate is worth more than \u00a32.35 million. If you have inherited your spouse or civil partner\u2019s unused residence nil-rate band you will have lost both allowances if your estate is worth \u00a32.7 million.<\/p>\n But while the gift to charity reduces the value of your taxable estate, HM Revenue & Customs doesn\u2019t 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.<\/p>\n For example, say your estate is worth \u00a32.2 million and you are leaving it to your children. It is \u00a3200,000 over the residence nil-rate band, so you lose \u00a3100,000 of the \u00a3175,000 allowance. Giving a \u00a3200,000 gift to charity doesn\u2019t change this fact, even though it brings your estate to the \u00a32 million threshold.<\/p>\n