Families saved £1.28 billion in Inheritance Tax last year by leaving gifts to charity in their wills, according to data from law firm TWM Solicitors.
Inheritance Tax is normally due on estates worth over £325,000, with a standard rate of 40% charged on the value above this amount. Gifts to charity are exempt from Inheritance Tax, and the amount saved through such gifts has risen 88% over the last five years, from £680 million.
Reduced Tax Rate for Charitable Estates
Where 10% or more of an estate is left to charity, the remaining taxable estate benefits from a reduced Inheritance Tax rate of 36%, compared with the standard 40%. HMRC figures show this reduced-rate relief saved estates £55 million in Inheritance Tax last year.
Gillian Dunlea, Managing Associate at TWM Solicitors, said leaving charitable gifts is often driven by personal reasons but added that many families do not realise it can reduce Inheritance Tax. She said: “Some people are understandably concerned about the level of IHT payable on their estates, and charitable giving can appeal because gifts to charity are free from IHT.”
Pension Changes and Estate Planning
Dunlea also noted: “With pensions being subject to IHT from 2027, pensions may become less tax efficient for families to inherit, so clients should review their pension nominations alongside their wills, particularly where they intend to make charitable gifts as part of overall estate planning.”
She added: “Many charities are under increasing financial pressure and legacy gifts do play an important role in supporting their long-term work. For some charities, larger gifts left in wills can be transformative.”
Inheritance Tax Rules and Allowances
In the UK, fewer than 5% of estates trigger an Inheritance Tax bill due to several rules and allowances that can boost the tax-free threshold. There is no Inheritance Tax due on any gifts if the donor lives for seven years after giving them, unless the gift is part of a trust.
No Inheritance Tax is payable when an estate is left to a spouse or civil partner. If a home is given away to children or grandchildren, an additional £175,000 allowance applies, increasing the overall Inheritance Tax threshold to £500,000. For married couples or civil partners, any unused Inheritance Tax allowance can be passed on when one dies, meaning a couple can potentially pass on as much as £1 million without their estate being subject to Inheritance Tax.
