Charitable giving is on the rise as some families rely on a legal loophole to lower the rate of inheritance tax they pay. But experts are warning gifting errors can lead to costly challenges, unnecessary delays and added complexity for families already coping with bereavement.
Gifts to charity are exempt from inheritance tax, reducing the overall taxable value of your estate. In addition, where 10% or more of your net estate is left to charity, your loved ones will typically qualify to pay a reduced inheritance tax rate of 36%. That is a 10% saving on the normal IHT rate of 40%.
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John Roberts, partner and director at Austin Lafferty Solicitors, said: “While leaving a legacy to a good cause is often an entirely altruistic act, it can also provide tangible benefits for your beneficiaries and family.”
Any tightening of the charity giving rules seems unlikely, however, leaving the loophole to a reduced IHT bill open for now. To make the most of it, it’s important to avoid some common mistakes.
How to avoid common mistakes when leaving a legacy
1. Make a will
While it is sometimes possible for funds to reach a charity without a will, the only legally certain way to ensure your wishes are honoured is to make a valid will. By doing so, you provide clear instructions on how your estate should be distributed, and it becomes the responsibility of your appointed executor to see that these instructions are carried out.
Almost two-thirds (62%) of the high-net worth families in the Rathbones study included a charitable gift in their will – averaging £233,000 – and 83% of those without a will intend to write one within three years including a charitable gift.
“No matter the size of your gift, it is essential to set out the details accurately in your will,” said Roberts from Austin Lafferty Solicitors. “Doing so avoids unnecessary confusion, complications, or disputes during probate, and ensures your generosity reaches the cause you intended.”
2. Include the charity’s full and correct name
When leaving a legacy to charity, it is vital to use the organisation’s full and accurate name in your will. Many charities have similar names, operate under different branches, or may have changed their legal structure over time – this is particularly true of smaller organisations.
“Being precise helps to ensure your gift reaches the intended organisation without delay,” Roberts said.
3. Provide the official charity registration number
Including a charity’s registered number in your will adds an extra layer of certainty that your gift will go to the right place. While names can sometimes be similar or change over time, a charity’s registration number is unique and permanent.
Roberts said: “Citing this number helps your executors identify the correct organisation quickly and ensures your legacy is directed exactly as you intended.”
4. Confirm whether the donation is before or after IHT
“It is essential to provide clear direction on whether a charitable donation is to be made before or after inheritance tax (IHT) has been deducted, as this distinction can significantly impact both the charity and other beneficiaries,” said Roberts.
When a gift is made before IHT is calculated, the donation is deducted from the estate prior to tax assessment. As charitable legacies are exempt from IHT, this approach typically reduces the taxable value of the estate and may increase the amount available to other beneficiaries.
In contrast, when a gift is made after IHT has been applied, tax is first charged on the entire estate. The donation is then taken from the remaining balance, which can result in the charity or other beneficiaries receiving a smaller legacy than intended.
5. Be explicit about the use of your donation
In most cases, gifts left to charity in a will are combined with others to fund the charity’s core work, such as delivering services, supporting research, or raising awareness. Donors who would like their legacy to be directed toward a specific project or location are encouraged to discuss their wishes with the charity in advance.
“This ensures the gift can be honoured as intended and used in a way that truly reflects the donor’s values,” Roberts said.
6. Have open conversations with family
Openly sharing your intention to leave a gift to charity in your will is a thoughtful and practical step. Clear communication can help prevent misunderstandings, reduce the risk of disputes among family members, and provide reassurance that your wishes will be respected.
7. Outline an alternative use of the funds should circumstances change
If you are supporting a small or local charity, the organisation may close, merge, or change direction before your will takes effect. A solicitor can provide guidance on wording that ensures your gift is redirected to a similar charity should your original choice no longer exist, safeguarding your legacy for the cause you care about.
“Alternatively, you can leave discretion to your executors or solicitor to select a suitable charity within a theme close to your heart,” said Roberts, “whether that’s children, wildlife, heritage, culture, developing countries, or even keeping the local cricket club supplied with tea and biscuits”.
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