The tax advantages of leaving money to charity in your will

Erica McKoy: There can be great tax incentives if you choose to donate to a charity in your will, Sam. Meaning your loved ones can benefit from more of your estate too. So, is it a simple yes to the question? Should you donate to a charity in your will? Let's find out on this episode of Which? Money.

Hello, it's Erica in the Which? studio alongside Deputy Editor of Which Money, Sam Richardson.

Sam Richardson: Hey there.

Erica McKoy: And from our legal team, James Buchan.

James Buchan: Hi there.

Erica McKoy: Okay, Sam. There's lots here. We're going to be talking about charities and wills and I'm curious. Why did you write your piece about donating to charities in your will?

Sam Richardson: It was partly that New Year feeling of the world is terrible and surely there's something we can do about it. And partly because I was writing my own will at the time. I've been writing about wills here for years and years, hadn't done one myself – the hypocrisy was huge. And so I did one with Which? Wills.

And there was that decision about okay, I would like to leave something. How does that work? For me personally, inheritance tax wasn't an issue, but it's a huge concern to many of our readers. So, it was a real chance to get into, is this money useful for charity? How do they think about it? And how should people writing a will think about it? And is there a combination – and it's an awkward one to discuss – between helping out charity, supporting a good cause, and reducing your tax burden? And it turns out there is.

Erica McKoy: There's lots of charities who rely on donations, Sam. Can you tell us a bit more about that? Because I don't think people necessarily know that.

Sam Richardson: I was amazed to find this out when I was talking to various people from the charity sector. So, the first stat I heard was that legacies, which are donations in people's wills, make up 30% of fundraising income for charities. That's massive.

And for some particular charities, it's even more. So, this was wonderful, I thought. The Royal National Lifeboat Institution – RNLI – six out of ten of their lifeboat launches are funded by legacies.

Erica McKoy: And they don't get money from the government to do their role.

Sam Richardson: Exactly. And this is a very essential life–saving service funded by what people leave in their will. I thought that really put it in a very tangible way for me.

Erica McKoy: James, you used to work in private practice, now you work across Which? Wills.

James Buchan: That's right.

Erica McKoy: Do you see lots of people donating in their will?

James Buchan: You do, and you see it across a breadth of different types of charities and organisations as well. So, you'll see your – as Sam mentioned – about the RNLI and big traditional charities, but then you will also see people gifting to more smaller local charities, or even some organisations that you may not consider to be a charity, like church groups or family groups.

Those sort of things which aren't necessarily registered charities, but they do come under the charity umbrella from an inheritance tax point of view. So, you do see a large length and breadth of local, national, regional, international charities that people do gift to in their will. It is a very popular thing to do.

Erica McKoy: And you mentioned gifts. There's three main types of gifts. Can you tell us a bit more about them?

James Buchan: I suppose the three types of gifts are – there's cash legacies, so you gift a certain amount of cash from your estate to a charity or a pecuniary legacy, if you want to give it its more formal title.

You could gift a charity a specific item. So, if you've got a painting that's worth a certain amount of money, you could gift them that if you wanted to, or something along those lines.

Or the other gift is a residuary gift. So, residue is in an estate when all of any liabilities have been paid, all the legacies have all gone out – you have a pot left. It's normally the biggest amount of what's left in the estate, but it isn't always, but usually it is. You can give them a share of that residue, so they will get a percentage of whatever is left over once everything else has been paid out.

Erica McKoy: There are some benefits to donating whilst you're still alive, aren't there?

Sam Richardson: Definitely. I mean, the first one obviously is charities need the money now. There's an enormous amount of need in this country whatever cause we're talking about.

But there's also a very technical one which, if you give while you're still alive and you're a taxpayer – most of us are – the charity can claim what's called Gift Aid, which tops up the amount of money they get at no cost to yourself. You often need to tick a box or something like that.

And particularly if you're a higher rate taxpayer – so you're earning more than £50,000 or £50,270 – it's quite a lot of money for them. It can be 40p in the pound. That doesn't apply if you donate in your will. So, I would say you can do both. You can get a regular donation going now – I've got some direct debits set up, I don't have to think about it even when I'm having a lean month – whilst leaving something in your will, because both will be really helpful to a charity.

Erica McKoy: We spoke about it being helpful for you. I guess it's a bit of a philosophical, ethical question. Obviously, donating is helpful for you in terms of your inheritance tax or the inheritance tax that will be inherited by someone. But then there's also doing good for a charity. Do people ever think about that? Is that what people are often thinking about? Like, is this ethical? Is this the right thing to do?

James Buchan: I think so. I think you get different types of people. Some people are just very philanthropic and want to donate to charities and – particularly if they have charities that they're invested in. And some people look at the way of gifting to charities to reduce their inheritance tax bill, because it can do that.

Gifting to a charity or an organisation that comes under the umbrella of the Charities Act can – a gift to a charity is exempt from inheritance tax. So, you don't pay inheritance tax on any gifts that go to a charity. And if you give a certain amount of your estate to a charity when you die, you also get a reduction in the IHT from 40% down to 36% if your estate does pay inheritance tax. So, there can be advantages to doing that on death.

Erica McKoy: That's not as clear cut. It's quite a complicated process.

James Buchan: It is. A lot of people think, oh, I need to give 10% of my estate to charity and I get a 10% reduction in tax. And that's broadly what it is, but it's not as simple or as straightforward as it sounds.

And it's what people need to have is quite – not complex – but there is a clause that needs to be inserted into their wills which when they die looks at the situation it is at that time. And if their estate is taxable, they can then calculate how much needs to be gifted to a charity to take advantage of this reduction in IHT.

Because it's not just as simple as I'll leave 10% of my residuary estate to charity and then I'll get a reduction, because that might not be enough if you've got other gifts going on or lifetime gifts and those sorts of things. Or it might be too much if you don't want to give more than what you have to.

So, I think it's not straightforward. If you're thinking of doing it, get some advice is what I would say and make sure that you've got the right clauses drafted into your wills to make sure that your estate can take advantage of it.

Erica McKoy: And having a will in the first place means that you can control what happens to your estate.

James Buchan: That's right. I mean, we've spoken about wills quite a lot. I'm sure Sam has in terms of – I always have a saying that if you make a will you get what you want, if you don't make a will you get what you get.

And if you don't have a will, you rely on the intestacy rules, which is a strict set of rules as to who will inherit. Charities are not included in that. Eventually your estate can go to the crown or the state if you've got no relatives. So, if you want to leave gifts to charity when you die, the best way to do it is to make a will and you can include those gifts in there.

Sam Richardson: And just to chip in, there are so many other reasons to make a will which we've talked about so often. If you have an unmarried partner, they'll get nothing in the Intestacy Act – even if they're the parent of your children.

James Buchan: Unmarried partners have no rights or entitlement under an intestacy which, if you have people that do cohabit for lengthy periods of time or in relationships, but that relationship under intestacy isn't recognised.

And also, if you have children, appointing guardians who can care for them in the event that they don't have any parents left, or appointing executors who'll deal with the estate. You don't have any of those choices under intestacy. It's all in a strict criteria as to what happens.

Erica McKoy: Wow. And as well, I think lots of people don't realise that their estate will end up going to the crown.

James Buchan: It's a long process. You've got to go through spouses, children, grandchildren, parents, brothers, sisters, cousins four times removed. There's literally got to be nobody or nobody that can be found to get to that point.

But it does happen. There are many instances where it does happen. There's something that gets issued called the bona vacantia – sorry, going slightly off topic – but it basically gets issued, I don't know if it's monthly or weekly, it used to be weekly a long time ago.

And it's a list of all estates where somebody has died and nobody has come forward to claim anything. And that's when you get these heir hunters that you see TV programmes coming out and trying to find relatives. But it does happen where people have no relatives or nobody can be located and their estates will eventually go to the state or if you live in certain parts of the country it'll go to the crown.

Erica McKoy: Can we talk about inheritance tax? When I say that, it feels a big scary term because I think there's been lots of conversations about it in the press. We've heard inheritance tax, I've seen stories where people – someone in Kensington was worried about inheritance tax and the comments on the Facebook page was like, "but you're fine, you've got lots of money, it's not going to impact you that much." Anyway, lots of conversations about inheritance tax. Can you tell us a bit more about it? This is money that your family would have to pay, right?

Sam Richardson: I believe it's paid by the executor of your estate when you die. That's the person who's responsible for distributing inheritances. They would have to go through probate and pay the tax then.

Just with inheritance tax, a really good place to start with it is how uncommon it is for people to get a bill because you get so many tax–free allowances in what you can hand off. So, there's the nil–rate band, which is £325,000 per person you can leave tax–free. There's an extra one if you're leaving your main home to a direct descendant, £175,000.

Because you can leave everything to your spouse tax–free, couples can combine their allowances. So, a couple can pass on a million pounds worth of an estate if it includes that home they're passing on to their direct descendant.

And the key stat here is the most recent numbers we have – less than one in 20 deaths result in inheritance tax bill. Now of course there's an argument there, that's because a lot of people are very good at planning to pay the minimum inheritance tax.

But I would say to someone before they start making all their plans around inheritance tax, go on our website, search inheritance tax calculator and actually work out if you're at risk. And if you are, get planning, it's really good you checked, but don't let it determine your every move.

James Buchan: I would echo what Sam said. It's very low, the percentage of estates that pay inheritance tax. And that has increased in recent years because the allowances have been set since 2009. So, they haven't increased the £325,000.

But it is low and it shouldn't be the only determining factor that people think about when they're making their will or they're thinking about their estate, because there's lots of other things where inheritance tax might not be the determining factor if your estate is taxable.

I always think it's a nice problem to have because it means you've got a fair amount of money. But it's one of those things where I think people – they hear inheritance tax and they think it's automatically applies to them and it doesn't affect everybody in the same way that they think it does. So, it's really important that if you go onto our website, look and try and calculate what your estate is worth. And if you think this is going to be a problem for me, go and take some advice and figure out what your options are.

Erica McKoy: There's a line, Sam, that you wrote: "If you're planning to leave more than 4%, you may as well leave 10%." What do you mean?

Sam Richardson: This is the mathematical quirk with how it works. So, you need to leave – and I'm going to do this very carefully because it is quite tricky – 10% of your estate after allowances have been deducted. So, that's 10% of the taxable estate to get a discount on the – to pay a reduced rate of inheritance tax.

If you leave between 4% and 10%, you may as well have left 10% because 10% gets you that discount on the inheritance tax rate, so your beneficiaries will get more. So, if you leave 7%, you're not getting the discount inheritance tax rate. HMRC are still taking 40%, that's the usual inheritance tax rate. But if you increase it to 10%, the charity would get more and your beneficiaries would get more because HMRC is taking less.

Erica McKoy: Do people know about this?

James Buchan: It is a quirk and it only works in certain circumstances depending on the value of your estate. It's a small amount of people that it would affect. But there are situations where by removing all of your allowances and then looking at what your estate's valued at, you can leave the 10% and actually the charity gets some money and your beneficiaries actually end up getting more because the amount of inheritance tax is reduced significantly so that you don't have so much of a burden.

Erica McKoy: It does sound very niche though and it doesn't sound like it's something that will impact everyone.

James Buchan: It doesn't impact everyone but it's one of those things that it's really good to be aware of. If you are in that bracket and you do need help and advice that actually there can be situations where by getting that and doing things and making sure that you are getting the help that you need that you are really getting a benefit and that your beneficiaries eventually will get a benefit as well.

Erica McKoy: Okay, so if people have listened to this podcast and they're like, oh, Sam's written his will. Have you written yours?

James Buchan: I have. I'm the worst person in the world for telling people to write their wills. I actually do need to update mine. Not through anything dramatic, but I do need to – I thought about this the other day actually and I thought actually my wife and I need to slightly amend what we've got in ours.

It's one of those things where people think, I've made a will I can forget about it now, I don't need to think about it. And actually it is a fluid document that you should review it quite regularly to make sure actually is this still what I want? And has things changed legally, which mean I've now got the charitable reduction in IHT, for example? Can I do something in that respect or have I fallen out with somebody that's in there or have I got a child or is there a death, divorce, marriage?

All those sorts of things could have an effect. So, it's really important if there are events that have happened, look at your will and review it and if you need to make change you need to make changes. A will's not a once and done, don't need to think about it anymore. It is something you do need to come back to and revisit.

Sam Richardson: And I think from the charity's point of view – I'm very much hoping in 20 years I'm better off than I am now and I will be able to leave more in my will than I am now. Now of course you can just leave a percentage of your estate in your will, but I decided on actual amounts. So, I would hopefully like to update them higher in the future if everything goes well.

Erica McKoy: Do we have any recommendations at Which? for how often someone should check on their will? Is it every five years? To me, I just pick five years.

James Buchan: Some people say five years. I would say pull it out the drawer every few years or if there's a life–changing event. Like I said, if somebody is born or dies, you get married, get divorced or there's something happens in your life that's quite major. Just have a look at it and make sure it is fit for purpose still, because they quickly become outdated because life moves on and you forget about things. So, it's really important to make sure that actually it is still what you want to happen.

Erica McKoy: If people are writing or updating their will, there's a five–step plan, isn't there, Sam?

Sam Richardson: First one of course is pick a charity – what cause you're really passionate about. It doesn't actually necessarily need to be a charity in the strict sense of the term. It can be certain community groups, certain amateur sports associations.

James Buchan: The umbrella for charitable is quite broad. So, the definition is a very lengthy definition and there's loads of different categories in the legal terminology about what can be defined as a charity. It can be sports groups, arts groups, animal – if you want to donate to some cats.

If you want to leave money to Cats Protection or something along those lines, they are a charity, but yes, you can leave money to arts groups, museums – lots of people actually do donate, particularly wealthy people do donate art pieces and whatnot to museums. So, it's a very broad catch–all in terms of not just a registered charity in the traditional sense.

Sam Richardson: Once you've picked it, then you can actually get your will written. We've got loads of guides now to do this – Which? has its own will–writing service. If you've got a really complex estate, a load of complicated family dynamics, you might want a solicitor.

Then I would really recommend having a conversation with the people who will be beneficiaries of the will and the people who'd expect to be beneficiaries of the will. And you might think this is just something for someone who's got loads of children and grandchildren, but actually I had to talk to my fiancée about what I'd done in the will.

And it is sometimes slightly awkward one, it's saying to them, "actually you're not going to get everything, I've put this amount of money to go to a charity and this is why I feel it's really important." Don't have this conversation in order to decide what to do – it's your will, you make the decision, but just make sure that everyone understands why it's like that. Because wills can be challenged in certain circumstances and the best way of stopping that from happening is having everyone in the know so there's no shock.

Erica McKoy: Making sure everyone's clear about what it is. But you hear stories all the time where people are like, "oh I thought my grandma was going to donate to us but actually she's given it all to a cat charity and she didn't give any money to us." That does happen. So, then the final step is to keep that will updated. We've spoken about it, but keeping it updated, having a look over it. If there's any big events or any big moments, double checking it and making sure you're still happy.

Sam Richardson: And just to add a really specific point here – make sure that you have the will available for other people to find. If you have it in your Google Cloud storage, which is password protected, how do you expect anyone to get to it?

James Buchan: That's a good point. It's always let your executors who've you appointed to deal with your estate know where your will is – the physical will is. Where you've stashed it – if it's under the floorboards in the third bedroom at the back of the house and all those sorts of things, you need to make sure you let somebody know so they can find it.

Erica McKoy: So, maybe this is a silly question, but could someone in theory write a will on a piece of paper and then just have it stored away in their house – physically write a will?

James Buchan: There's certain formalities that have to be complied with under the Wills Act in what is included in the will and the way it's signed and executed and witnessed. But yes, there's nothing to stop somebody handwriting their own will and as long as it's signed and executed and witnessed and all those sorts of things and all the formalities are complied with, it would be a legally valid document.

Now, I've seen a lot of wills that people have drafted themselves and they are quite problematic because I always liken it to – I'm not an electrician and if my house electrics go, I'm not going to try and fix them because I'll probably kill myself and blow the house up. And that's the same rule of thumb you should apply to anything that's not your skill.

You need to carefully think about whether you're going to get this right. We see lots of examples where people will write what they want and actually it makes very little sense whatsoever. They know what they mean. Actually when you then say, well what about this, what about that, what if this happens? "Oh yeah, didn't think about that." And it's because not everybody thinks about the quirks and nuances and the word can make a big difference.

There's a big case not too long ago that all hung on whether or not a farm or a farmhouse has been gifted. Big difference, but it's one word and it was a huge case that went all the way I think up to the High Court in order to be decided and it was quite a big problematic big case.

So, it's really important to make sure people know you've made a will, they know where it is. I would also say as important is to let people know what is in your estate, because otherwise your executors are stabbing in the dark really. If they don't know that you bank with NatWest and you've got an investment portfolio with AJ Bell or whoever it is and you've got a pension or whatever it might be, it's then a lot of hard work for them to then start from scratch to find paperwork to figure out where you might have things.

And like Sam said, if you've got everything stored on a cloud and you never get any post, they're never going to have any idea how to find it then. So, you can always make a letter of wishes which sets out all of your various assets and those sorts of things and put that alongside your will. Don't attach it to it because that creates even more problems, just place it with your will so that when the time arrives, your executors have everything they need to be able to deal with the estate.

At what is a very emotional time and I think that's one thing people don't factor in, that if a family member has died, dealing with British Gas or whoever it is is not what anybody wants to be doing. No offence British Gas – other energy providers are available – but it's one of those where make it easier for people so that they know and talk to them like Sam said about it first.

Talk to your executors. We actually had a member we spoke to recently who had just received a letter through the door from a solicitor telling her she was an executor for somebody she hadn't spoken to for 15 years and was never asked and was like, "oh, what do I do, I don't know anything about them." And so she decided to step down, which was fine. But it's really important to make sure you make things as easy and as organised for the people who are going to be picking up the pieces and carrying on that mantle after you've died to be able to deal with things.

Erica McKoy: I think that's a great way to wrap it up, because it's true. Often people are dealing with wills after someone's passed away usually and so you want to make it simple and as easy and as effective as it can be so that no one's stressed out, there aren't family issues after as much as you can help it. Thank you for joining me today.

James Buchan: You're welcome, no problem.