As well as benefiting others, charitable giving can reduce the inheritance tax rate by up to 4%, writes Carl Drummond.
Every year, millions of people around the UK give their time and money to help others.
Our own research shows that charities are set for a significant windfall as one in eight millennials who expect to receive an inheritance of more than £50,000 have already decided that they want to pass some of it on to charitable causes.
Today’s millennials are set to be handed a record sum when their parents and grandparents pass away. Our report, The Generation Game, found that 5.1 million people are likely to receive an inheritance of more than £50,000.
It’s interesting that despite the hurdles that many young people face, such as getting on to the property ladder, many would still use a portion of their inheritance for good.
It is positive for society that younger generations increasingly want to use their wealth for good. And it can be positive for the individuals and their families as well when considering inheritance tax.
As it stands, you can leave everything to your spouse tax-free. But for those who want to pass something on to other loved ones, the money is subject to inheritance tax. The rate is 40% on any amount greater than £325,000. But there is one key exception.
Giving to charity can reduce the tax rate by up to 4%, which can make a huge difference in the long term. When donating to charity there are three types of legacies:
Pecuniary: the simplest form of legacy to leave to a charity, and the most common. Basically, it’s a cash amount, so you state in your will that you wish to leave £X to a particular charity.
Specific: when you leave an item, such as property or shares. So, you could, for example, leave £X worth of individual shares to charity.
Residuary: when you leave the whole or a share of what’s left to charity once everything else has been paid such as gifts, taxes, debts and costs.
Inheritance tax planning can seem overwhelming, and with a record sum of money being set to be passed on, getting professional advice is a sensible step. An adviser can reduce the stress of the decision-making process and ensure that decisions are the most suitable for each particular situation.
The key is to access that advice as early as possible, and to share your plans with your family. The more informed they are, the easier it will be when the plans need to be actioned in the future.
Carl Drummond is a wealth planner at Sanlam UK.