Why gifting to charity can benefit in more ways than one

As advisers, we always encourage people to think in terms of ‘required spend’ and ‘discretionary or desirable spend’ and for most people, charitable donations won’t fall into ‘required spend’. But there’s a case to say that maybe they should.

When done well, gifting to charity is of course an opportunity to make a real difference, but it also makes sound financial sense – it is genuinely a win all round. How often do you get say that?

Don’t get me wrong, I am not here to tell anyone how much they should give to charity or indeed, that they should at all. That is a very personal choice. I’m here to highlight the financial advantages of giving to charity that are well worth a closer look, even when things feel uncertain.

The biggest benefit is that all gifts to charities are exempt from Inheritance Tax (IHT). This means that you can essentially extend the amount of money that will be IHT-free, by either leaving money to charity in your Will or making regular donations. From a tax efficiency perspective alone, charitable donations should be very much on your radar. Importantly, though, you need to check your chosen charity is UK registered, otherwise donations won’t benefit from the available tax breaks.

A generous donation can reduce IHT from 40% to 36%

There’s no getting away from the fact that there is a finite amount of money that is protected from IHT. The rest will be liable to be taxed at 40%. How much this will be depends on a number of things, your marital status, the value of your property, how you plan to share your wealth with your family and others. By leaving a donation to your chosen charity or charities in your Will, you will increase the amount of your money that is protected from IHT and it will be spent on something you believe in. Leaving a charitable legacy in your Will of at least 10% of your total estate will reduce the rate payable on the remainder of the estate from 40% to 36%. This can make a huge difference to the amount of IHT paid on your estate by your loved ones.

Making regular gifts out of surplus income can also be effective from an IHT point of view and it may feel easier to take this approach over leaving a set amount in your Will. When you have a clear understanding of how much money you need to live the life you want (something we can help with), you will be able to see how much you can comfortably afford to give to charity at different points in your life.  And if recent years have taught us anything, this may change year on year, but this approach gives you the power to tweak things accordingly. Every time you make a donation, you are reducing your exposure to IHT in the future. Yes, you need to keep the paperwork and be able to show the paper trail, but it is well worth the effort from an IHT perspective.

The gift that keeps on giving

It goes without saying that using Gift Aid remains a highly tax efficient means of gifting to charity. If you’re a higher-rate taxpayer, You can claim back the difference between the tax you’ve paid on the donation and what the charity got back when you fill in your tax return. It’s the same if you live in Scotland. You can do this either through your Self-Assessment tax return, or by contacting HMRC and asking them to amend your tax code. To explain, if you were to donate £100 to charity – they claim the 20% Gift Aid to make your donation £125, you pay 40% tax so you can personally claim back £25.00 (£125 x 20%).

The key to getting this right however, is to do your homework on the charities you want to support in this way or in your Will. It may be a cause that you believe strongly in, but take a closer look at how they use their funding and how efficient they are with their donations. Larger, big name charities have often come under pressure here (and been exposed in other ways). As a result, you may want to choose a grassroots charity where your money may not be spread as widely, but you perhaps feel more of your money will get to the people who need it most. I will just reiterate however that the charity must be UK registered to benefit from the tax breaks.

This article first appeared in our Good Causes Edition of SKQ.