How can you reduce your inheritance tax bill?

How can you reduce your inheritance tax bill?

Give money to charity to reduce your inheritance tax

Tuesday 16 January, 2024

If you are looking to reduce the amount of inheritance tax you pay the government, consider making a charitable gift in your will.

This can be very tax efficient as the donation is taken off the value of your estate before inheritance tax is calculated. If the charitable gift is large enough it could also reduce the amount of inheritance tax, you pay. 

Charitable gifts of over 10% can reduce your IHT bill from 40% to 36% 

If you make a charitable gift of 10% or more of your estate to a qualifying charity this will not be included in your estate for inheritance tax purposes, and the taxable part of your estate would be charged at 36% rather than 40%. However, if less than 10% is given to charity the donation would still be deducted from the estate before inheritance tax is calculated. 

The net estate is determined as the ‘baseline amount,’ which is the value of the estate held in the individual’s own name so doesn’t include joint assets. Then funeral expenses, debts, and other inheritance tax planning exemptions such as the nil rate band will be deducted. 

Inheritance Tax Planning example 

If John has an estate worth £1,000,000 when he dies and leaves everything in the estate to his two children, but makes a £65,000 gift to charity, his baseline amount would be calculated as: 

1,000,000 (less funeral expenses £10,000 & the nil rate band currently £325,000) 

Baseline amount = £655,000 

As the charity gift is more than 10% it will be deducted from the value of the remaining estate before his net estate is charged inheritance tax: 

£655,000 - £65,000 = £590,000 

The £590,000 will be taxed at 36%, so his children will be liable to pay £212,400 in tax 

rather than £262,000 in tax, (£655,000 at 40%). 

If John had left less than 10% of his will to a charity his children would pay more inheritance tax and the charity would receive a smaller gift. If the deceased leaves less than 10% of the baseline amount to charity it could be possible for the beneficiary to increase the gift so the inheritance tax rate of 36% is used to calculate the tax paid on the estate. 

Simon Prestcote, chartered wealth manager and financial adviser in Barnet, North London said: 

‘I often meet clients and always encourage them to keep their will up to date and set up Lasting Powers of Attorney. When we discuss wills, I discuss how a charitable gift can potentially reduce the IHT their dependents will pay. Many clients don’t know about paying reduced IHT, and as charitable donations are an excellent way to give something back when it’s often something clients are interested in exploring in more detail. When you leave a gift to charity you can state how much you would like to gift, or simply leave a percentage of your total assets. If you are looking for ways to reduce your inheritance tax bill charitable donations are worth considering. In the example above the charity was given a £65,000 donation. John’s children received £188,000 each (£590,000-£212,400 = £377600 to be divided between both children). If John hadn’t made the charitable donation his net estate would have been worth £665,000 and his dependents would pay 40% inheritance tax 

(£665,000-£262,000 = £403,000). His children would each receive £201,500. Making a charitable donation reduced the amount of tax paid to HMRC and his children each received £13,500 less in his will, but the charity received £65,000.’ 

Simon Prestcote, member of the Barnet, North London financial planning team continued: 

‘We really encourage our clients to regularly review their inheritance tax planning and even speak to their children and other family to discuss the wider implications for their financial planning. It’s particularly important to speak to your solicitor and keep your will up to date, when you experience a significant ‘life event’ for example a marriage or civil partnership, the birth of your children or death of a close relative. If you haven’t yet set up a will, we recommend you speak to your solicitor. If you require financial advice, call your local Lonsdale Wealth Management financial planning teams in Barnet, Stafford, St Albans, Ware, Harpenden, Chippenham, Ringwood, Wimbledon, and Leeds / Bradford for more information on inheritance tax planning, or complete our booking consultation form. 

In Summary… 

If you want to reduce the inheritance tax you pay HMRC, contact your Lonsdale Wealth Management financial advisors for personalised inheritance tax planning advice. Remember it’s never too late to take financial advice and we offer financial planning for whatever stage of life you are at. 

Please note - The Financial Conduct Authority does not regulate tax advice or Wills.

For more information read: 

Howard Goodship, IFA Ringwood - Mitigating Inheritance Tax at the right time 

Simon Hawker – Lonsdale Services voted in the top 100 financial advisers in the UK 

Neil Homer, IFA Stafford – when should you pay for independent financial advice 


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