I’m 70 and wish to depart my cash to charity, will I’ve to pay inheritance tax?

I am 70-year-old single man and in reasonable health. Being brought up by a single mum, I was taught to watch my pennies and have done so all my life.

In doing so, I have savings of around £200,000. I also have two pensions where I have already withdrawn my tax-free lump sum and have nearly £100,000 in those.

However, I also have a house worth around £230,000 as I live in Wales and property is much cheaper here.

That puts me over the inheritance tax threshold. More so now Labour will include any pension as well.

Now as with most people, my savings have already been taxed and my pension will be taxed when I go to withdraw it.

I do not have any siblings and would like to give the bulk of it to charities on my death.

If I specify these in my will, will there still be inheritance tax, or do I have to donate now and hope I live another seven years.

Would a trust be a way to go, as it is just me? P.S, via email

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Harvey Dorset, of This is Money, replies: Often, and understandably so, people are keen to reduce their inheritance tax bill when leaving their money to their children or other relatives, as they want their estate to go as far as possible.

Its good to see that you want to do the same to ensure that your chosen charities can benefit from as much of your estate as possible.

Even if you are considering leaving just some of your estate to charity, there are things you need to take into account to avoid making some all-too common mistakes.

You can read our guide to leaving money to charity in your will, to make sure you avoid these pitfalls.

This is Money spoke to two financial advisers to find out what you need to do to make sure your money ends up where you want it to go.

Sean McCann, chartered financial planner at NFU Mutual, replies: As well as being one of the more unpopular taxes, inheritance tax can also be one of the most complex.

Currently, the value of your home and savings total £430,000. 

From April 2027 the value of your unspent pensions will also be included in the inheritance tax calculation bringing the value of your estate to £530,000. 

To this you will need to add the value of any other assets you own, including house contents and your car and any non-exempt gifts made in the seven years before your death. 

You can deduct any liabilities including any outstanding mortgage you may have.

The amount of inheritance tax due (if any) will depend on the tax-free allowances you have available. 

Most people have a tax-free allowance of £325,000 and an additional £175,000 to use against the value of their home if being left to ‘direct descendants’ which includes children and grandchildren. 

If you were predeceased by a spouse or civil partner who didn’t use their full allowances on their death, the balance of both their allowances would be available to you.

On the assumption that you don’t plan to leave your home to direct descendants and don’t have any unused allowances from a late spouse or civil partner, based on the current value of your house and savings the potential Inheritance tax bill would be £42,000. 

From April 2027, adding in the current value of your pension funds, this would rise to £82,000

The good news is anything you gift to charity during lifetime or on your death is normally exempt from inheritance tax.

Gifting to charity can also bring other tax benefits. If you decide to make gifts to charity during your lifetime, you can boost the value received by the charity by making the donations via gift aid. 

For every £100 you donate, the charity can claim an additional £25 from HMRC. 

If you’re a higher rate taxpayer, you can reclaim up to an additional £25 via your tax return.

If using gift aid, you need to ensure that you don’t gift more than your taxable income, to avoid a potential Income tax charge.

You can give away as much as you like to charity on death without needing to worry about inheritance tax. 

By leaving up to 10 per cent of your net estate to charity you can reduce the rate of any inheritance tax payable on the rest of your estate from 40 per cent to 36 per cent. 

The rules on what constitutes your ‘net estate’ are relatively complex, so it can make sense to take advice.

Zoe Davies, private client partner at Forvis Mazars, replies: There is the option to donate your income and savings to charity both during your lifetime and through your will. 

However, you should consider carefully the levels of cash you can gift away during your lifetime whilst sustaining your required standard of living. 

You may need to consider, for example, the possibility of needing funds for long-term care costs in older age.

Lifetime donations 

Charitable donations made to UK registered charities during your life will not be subject to inheritance tax, and there will be no tax charge if you were to die within seven years of making those donations. 

Although, adequate records of such gifts should be kept for your executors. 

Cash donations with a valid gift aid declaration can also offer income tax relief by extending your available basic rate band if you are a higher or additional rate taxpayer. 

You would receive basic rate tax relief at source as your donation would be topped up by 20 per cent and further relief could be claimed via your self-assessment tax return by extending the basic rate band by the gross donation. 

This increases the amount of income charged at 20 per cent instead of 40 per cent/45 per cent, reducing your income tax liability.

In order to make a valid gift aid claim, you would need to ensure you have paid sufficient tax for the year to cover the basic rate tax relief given at source (i.e. the amount the donation is topped up by). 

If you have not paid the equivalent amount of income tax or capital gains tax during the year to match the amount of gift aid claimed by the charities, the difference would be due to HMRC. 

Gifts made through a will 

If you choose to make charitable donations after death through your will, you will need to include the details of the relevant charities you wish to donate to, including addresses and registered charity numbers, to avoid any confusion for your executors.

Gifts made to UK-registered charities through your will would be classified as exempt transfers, meaning that these amounts would not form part of your chargeable estate for inheritance tax purposes.

As such, should you leave your entire estate (or the excess over your available nil rate band and residence nil rate band if applicable) to a UK-registered charity or charities, no inheritance tax should be due.

Where 10 per cent or more of an individual’s net estate has been left to a UK charity, then any amounts within the estate that remain liable to inheritance tax would be taxed at a rate of 36 per cent rather than the standard 40 per cent.

Charitable trusts 

The creation of a charitable trust allows an individual to make tax-effective gifts, both cash and non-cash, which can then be invested, allowing your donation to grow over time. 

The trustees would then be able to make donations as and when they see fit to charitable causes.

Any charitable trust that wishes to qualify for the relevant tax exemptions would need to be registered with the Charities Commission and meet strict regulatory conditions.

When setting up a trust, an individual should also be aware of the annual reporting requirements and the potential fees associated with this and other running costs.

As an alternative to setting up your own charitable trust, donor advised funds can be used when individuals are considering making substantial gifts to charities.