Q: What are the tax advantages of giving to charity during your lifetime?
A: Gifts to charity during your lifetime are free from inheritance tax and making gifts to charity can also be beneficial from an income tax perspective. If you are a higher rate taxpayer, you will receive tax relief on any gift to charity for which you have claimed gift aid. Additionally, the charities will be able to claim an extra 25p for every £1 you have given to them.
Q: What are the tax advantages of giving to charity on your death?
A: Gifts to charity on your death are free from inheritance tax and will reduce the value of your taxable estate. Additionally, if you leave broadly ten percent of your estate to charity on your death then the rate of inheritance tax on your taxable estate will be 36% rather than the full 40%.
However, if you are married, it is sometimes best to leave your estate to your spouse and ask them to make the gifts to charity after your death as then they, and the charity, may be able to benefit from gift aid. Gift aid is not available then the gift is a legacy from an estate.
Q: If I know which charities I want to benefit, how do I obtain this relief?
A: If you know which charities you would like to benefit, then the easiest way to obtain tax relief is to make gifts directly to those charities either during your life or on your death. If you intend to make gifts to specific charities in your will, it is best to include provisions for what would happen if that charity is no longer in existence at the time of your death. This is likely to be more important if you intend to make gifts to smaller local charities rather than large national charities.
Q: If I do not know which charities I want to benefit, can I still obtain this relief?
A: If you do not know which charities you would like to benefit, and you would like to give a significant amount to charity, you can establish your own charitable trust and make gifts to that trust during your lifetime instead of directly to a specific charity. Relief can be obtained when you make the gift to the trust and then you can decide at a later time which charities or charitable purposes you would like to benefit.
Establishing your own charitable trust can be quite complicated. Therefore, if you would like a more simple structure with many of the same benefits, you can establish a trust or account through the Charities Aid Foundation (CAF).
The same approach can be taken on your death and, instead of making gifts to specific charities in your will, you could establish a charitable trust by your will and then write a letter of wishes to the trustees of that trust setting out the charities or charitable purposes that you would like to benefit. This allows you more flexibility than naming specific charities in your will.