3 tax perks of charitable giving

International Day of Charity is held annually each 5 September. The date is significant as it’s the anniversary of the death of Mother Teresa.

This year, as the UK contends with a cost of living crisis, many UK households will be turning to charity organisations like food banks. With increased demand and a rise in their own costs, charities will need all the support they can get.

If you are thinking of donating to charity – either during your lifetime or in your will – there are several great reasons to do so.

Here are just three of them.

1. Helping a cause you care about

If you can afford to give money to charity, the financial benefits for your chosen good cause could be huge.

This is especially true currently. A recent survey by the Charities Aid Foundation (CAF) and YouGov, as reported by Charity Link, found that:

• 86% of charities are worried about what cost of living increases will mean for those dependent on their services
• 71% of charity bosses are worried about managing the increased demand for their services
• 59% of charity bosses worry that people will stop, lower, or not start to give donations while the living costs continue to rise
• More than 80% of non-profit organisations are finding it difficult to manage their increased costs, such as rising rent, energy, and wage bills
• 35% state that they will struggle to survive the crisis.

If there is a charitable cause close to your heart, now would be a great time to offer your support. Donate now or set up a charitable legacy in your will. There are three main ways to do that:

• A pecuniary legacy means bequeathing a specific sum to a specific cause and is the easiest and most popular way to donate.
• A residuary legacy involves leaving some or all of your estate to charity, but only once all other bequests have been made and costs met.
• A specific legacy requires you to state an item or items that you wish to donate, as well as where you would like to donate them.

You’ll need to clearly state your intentions in your will and ensure that your will is up to date.

2. Lowering the value of your estate for tax purposes

In 2022/23, Inheritance Tax (IHT) is payable at 40% on the value of your estate above the “nil-rate band”. This currently stands at £325,000.

You can also make use of the “residence nil-rate band”, but only if you leave your home to a direct descendant. This can include a child or grandchild, as well as a stepchild or foster child.

The residence nil-rate band is £175,000 for the 2022/23 tax year.

Both the nil-rate band and the residence nil-rate band can be passed to a spouse or civil partner, effectively raising the tax-free value of the estate to £1 million (£650,000 plus £350,000).

Donations that you make to charity are made free of IHT. This means that making donations effectively lowers the value of your estate for IHT purposes, decreasing the potential liability you leave behind on death.

3. Decreasing the rate of IHT you pay

As well as falling outside of your estate for IHT purposes, charitable giving can lower the rate of IHT payable if the value of your estate exceeds the IHT threshold.

Donate more than 10% of your estate’s net value to charity and you could see the IHT rate drop from 40% to 36%.

This could make a huge difference to your chosen charities, as well as to the tax liability you leave behind.

Get in touch

At Logic, we can help you manage your long-term financial plans in a tax-efficient way. From pensions and investments to estate planning, we have decades of experience.

If you think you’d like to help a charitable cause you care about – whether during your lifetime or on your death – we can help you factor this into your plans, so get in touch now.

You can email us at info@logicfinancialservices.co.uk or check with your adviser.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.