The UK government cut the rate of inheritance tax (IHT) from 40% to 36% in 2012 for those who left at least 10% of their estate to a charity.
Government statistics indicate that since then there has been a sharp increase in the amount of charitable donations left in wills, with the amount of inheritance tax relief claimed through bequests to charities increasing 16% to £880m in the tax year to March 2017.
This is up from £760m in the year 2015/16. The amount has more than doubled in just the past five years from just £420m in 2010-11.
Karen Clark, tax partner at audit and tax consultancy firm RSM, said: “This would suggest that this specific government policy is working and that more estates that would otherwise be liable to an IHT charge, are leaving assets to charity than was the case in previous years.”
However, she added that there has also been an increase in family members challenging wills “where the family feel they have been disadvantaged as a result of the charitable bequests”.
£900m forecast
Roy Maugham, tax partner at accountancy firm UHY Hacker Young, said: “With many principal heirs of an age where they often will have already achieved a reasonable level of financial security, many elderly parents may not feel as obliged to leave them everything in their estate.
“As a result, many more individuals are increasingly putting charities as beneficiaries in their wills, in the knowledge the amount will obtain relief from inheritance tax in itself, and if it is equal to or exceeds 10% of the total estate the rate of tax on the rest of the estate will be reduced by a factor of 10%.”
He predicts that as house and share prices continue to increase relief on legacy incomes look set to “easily breach £900m in the next year.”
Case study
If a taxpayer leaves an estate worth £1m entirely to his children, then ignoring any other exemptions and reliefs other than the nil rate band, £730,000 would go to the beneficiaries and £270,000 to HMRC.
If 10% of that £1m estate above the £325,000 nil rate band is left to charity, the beneficiaries will receive £713,800, HMRC £218,700 and the charity £67,500.
However, Clark of RSM notes that working out whether a client’s estate qualifies is “not as straightforward as this example suggests”.
