HMRC - the magic money tree

Sponsored feature | Carolyn Bagley, Partner, HCR Hewitsons

If you want to help charities in your will, you can obtain tax relief on legacies from HMRC at no cost to your family.

Days are dedicated to raising support for worthy charities, such as the RSPB, hospices and youth clubs, but there’s only so much anyone can afford to leave in their will to beneficiaries other than their family. But there is a way to increase the charity pot without decreasing what others receive; tax relief - the magic money tree.

Charities (and testators) get added benefit from legacies because their share is free of inheritance tax (IHT). So, £1,000 left to charity from a taxable estate only costs the family £600 (the sum net of tax which the family would otherwise have received).

A larger benefit is often overlooked because it’s mistakenly thought to cost us more than it actually does.

Leaving 10 per cent to charity reduces the rate of IHT on the assets to family from 40 per cent to 36 per cent - but this is not 10 per cent of the whole estate, but 10 per cent of the ‘baseline amount’ which is calculated by deducting certain allowances.

This would typically mean that, when the second spouse in a couple dies, leaving an estate of £1m amongst charities and friends, the legacy to charities needed to obtain the lower IHT rate is £35,000. Still a generous legacy – but not 10 per cent of the whole estate (which would be £100,000).

The magic money tree comes into its own when charitable legacies are not quite at that level, enabling legacies to charity to be increased at no cost to the other beneficiaries, as long as the original legacy was 4 per cent or more of the baseline amount.

If, for instance, as in the example above, £17,500 is left to charities, but that legacy is increased to the full 10 per cent of the baseline amount (£35,000), then the full £35,000 goes to charities – but other heirs still receive exactly what they would have received if the legacy to charities had been the original £17,500.

HMRC entirely funds the increase in the legacy: it works because of the beneficial effect of the other heirs being taxed only at 36 per cent instead of 40 per cent, and only applies when a legacy is being increased from a certain level. For those already planning to leave something to charity, it is worthwhile reviewing the sums and shaking some extra money out of HMRC.

This increased benefit to charity, at no extra cost to other heirs, is obtained by a carefully worded will. Alternatively, if you have inherited recently, then you can rewrite the will of the person from whom you inherited to achieve this.

Contact Carolyn Bagley at cbagley@hcrlaw.com or 07584 015578.

Visit hcrlaw.com.

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