4% Tipping Point on Charitable Gifting in Wills

Posted:25th January 2023

Leaving Gifts to Charities

Commonly, those leaving a will (testators) make provision for part of their estate to be left to charity. Usually, testators choose to leave a gift to a charity for all manner of reasons; including to a charity which is close to the testator’s heart or to a charity which they have supported during their lifetime. In all circumstances, any gifts the testator makes to charities (during their lifetime or on their death) will be exempt from inheritance tax.

However, leaving a specific proportion of your estate to charity could also help reduce the overall inheritance tax which will be payable on your estate when you die. Currently, if inheritance tax is payable on an estate, this will be charged at the usual inheritance tax rate of 40%. Contrastingly, if a testator leaves 10% of their net estate to charity, a lower inheritance tax rate of 36% will apply to the taxable part of the estate.

What is the 4% Tipping Point and how does it work?

Whilst 10% initially appears to be a large proportion of the testator’s estate, leaving a larger legacy to a charity may result in your beneficiaries receiving more money. If testators already wish to leave a gift to a charity in their will, and that gift is at least 4% of their net estate value, then increasing this gift to 10% will increase the gift which the charity will receive. Simultaneously, this will not cost the beneficiaries anything, as they will benefit from the lesser rate of inheritance tax. The cost of the increase will become HMRC’s responsibility. Therefore, increasing the gift to 10% may be more efficient in benefitting both of your chosen beneficiaries, as the cost of a 10% legacy would be equivalent to the cost of the 4% legacy. This is what is known as the 4% tipping point and is illustrated in the below table:

Value of the Estate: £1,000,000
Baseline Amount: £675,000

No gift to charity 4% legacy to charity 7% gift to charity 10% gift to charity
Amount passing to charity £0  £27,000 £47,250 £67,500
Amount passing to non-charitable beneficiaries £730,000 £713,800 £701,650 £713,800
Inheritance Tax £270,000 £259,200 £251,100 £218,700
Total £1,000,000 £1,000,000 £1,000,000 £1,000,000

Moreover, testators are only required to leave 10% of their net estate to charity to benefit from the reduced inheritance tax rate. The ‘net estate’, also called the ‘baseline amount’, will include what is left of all of the testator’s solely owned assets once any reliefs or deductions (such as debts, funeral expenses and the testator’s ‘nil rate band’) have been applied. It therefore follows that the testator is not required to leave 10% of their entire estate to charity. This is a complex area of law, which includes consideration of available deductions and reliefs, and is best discussed with a legal professional.

Who benefits from this?

Although this reduced tax rate will not benefit those estates which are exempt from paying inheritance tax, it could make a big difference to the amount which charitable beneficiaries could receive from larger estates.

Importantly, if a testator has no prior wish to leave a gift to a charity at all, then leaving a 10% legacy to a charity would not benefit their non-charitable beneficiaries. This is because the non-charitable beneficiaries would receive less from an estate if a legacy is left to a charity, even though the full 40% inheritance tax rate would be charged.

It is therefore important for the testator to consider who they wish to benefit from their will. If they have no wish for a charity to benefit, then this wouldn’t be a viable option for them. This is because non-charitable beneficiaries would receive less than they would if there was no charitable gift. However, if a testator wishes to leave a legacy to a charity, they should consider the amount they wish to leave whilst considering the operation of the 4% tipping point.

For example, even though a testator may wish to leave a gift to a charity, if they only wish to leave 2% of their net estate to a charity, then their non-charitable beneficiaries would be at a disadvantage and receive less money if any gift to a charity is increased (even if the increase results in a lesser inheritance tax rate being applied and lesser inheritance tax being paid).

What if the Testator has not left 10% of their net estate to charity?

Although it is recommended for the testator to leave the required legacy to a chosen charity at the time of drafting their will if that is their wish, it is also possible for the beneficiaries to vary the will to allow the charities to receive a greater gift. Any variation would need to take place within 2 years of the testator’s death. For example, if the testator has left 4% of their net estate to a charity, the beneficiaries may wish to vary this so that the charity will receive 10% and the reduced inheritance tax rate would apply.

Nevertheless, even if the testator hasn’t left a gift to a charity or the gift falls short of 4%, the beneficiaries are still able to vary the will to benefit from the reduced inheritance tax rate. However, as set out in more detail above and as illustrated in the above table, this would result in the non-charitable beneficiaries receiving less from the estate. In this situation, certain requirements must first be met, and in these circumstances, it is advisable to seek legal advice.

To speak to someone in our Wills team, please contact your nearest office to make an appointment or begin online.