A "very effective" estate planning tool could reduce the inheritance tax rate by 10% for British citizens

Professional advisers report that a surge in people revising their estate plans is being caused by changes in inheritance tax policies

A little-known inheritance tax (IHT) rule that could reduce the inheritance tax rate by 10% is being promoted to British citizens. It coincides with an increase in the number of anxious families seeking the advice of estate planning experts.

Making a bequest to a charity in your will is the key to obtaining a lower inheritance tax rate.

Inheritance tax is not applied to the actual gift. However, if you leave ten percent or more of your net estate to charity, your loved ones will usually also be eligible for a 36 percent inheritance tax reduction. Compared to the standard IHT rate of 40%, that represents a 10% savings.

According to Jude Dawute, managing director of Benjamin House, a financial planning company, "It's an easy, efficient way to reduce the IHT burden and support worthwhile causes.

Dawute provided an illustration.

With an estimated IHT bill of 460,000, one client's estate was worth 2.5 million dollars. They lowered their IHT rate to 36% by donating 10% of their net estate (225,000) to three registered charities in their will, which resulted in a tax savings of about £60,000," he said.

While 225,000 went directly to causes they were passionate about, the remaining 60,000 remained in the family. They reduced the IHT bill to £400,000.

In separate guides, we examine how receiving gifts from loved ones can lower an IHT bill or prevent inheritance tax.

Demands for advice are triggered by changes in inheritance taxes.

Wealth planner James Graham of Succession Wealth claims that the changes to inheritance tax laws, specifically the freezing of the nil rate band and the addition of unused pensions as part of the taxable estate starting in April 2027, "are prompting more people to consider charitable legacies as part of their estate planning."

Nearly all (92 percent) of the financial advisors, lawyers, and will writers polled by Remember a Charity think that estate and tax planning will become more important as new inheritance tax laws are implemented over the next two years.

A survey of more than 200 estate planning professionals found that 65 percent of them believe their clientele will place even greater importance on charitable tax incentives, and six out of ten say they are already receiving more requests for advice.

The modifications to IHT are causing a fundamental reevaluation of estate planning strategies, especially among clients who may not have been affected in the past, according to Tanya Watson, senior director and chartered tax adviser at Alvarez & Marsal Tax LLP.

The aforementioned modifications give advisors a good excuse to review legacy plans with clients who might not have previously explored charitable giving as a planning tool.

How do I leave a legacy of charity?

Through a person's will, charitable donations are made in the most popular and straightforward way possible. This enables people to give a specified gift or a portion of their estate to a designated charity. If at least 10% of the net estate is given to a charity, the inheritance tax rate can be lowered from 40% to 36%.

Charitable trusts may also be taken into consideration for larger or more complicated estates.

According to Dawute, "these can offer more flexibility but require more planning and administration because they allow donors to allocate funds over time, often in line with particular aims or governance preferences."

Usually, the financial advisor starts by figuring out the client's inheritance tax obligation using the current allowances and asset values.

After that, they assist in creating a proper balance between what is bequeathed to family and what might be donated to charity in order to maximize the estate's worth and the legacy it leaves behind.

If you leave a legacy to a charity, they may assist you with writing your will. For example, Macmillan Cancer Support provides a free will service and the opportunity to leave them a portion of your estate.

Many of my clients are driven by a personal connection to a cause, according to Graham. For instance, one client recently changed her will to leave a legacy to a nearby hospice that had provided care for her husband.

Things to take into account when deciding on a charitable legacy.

The most intimate aspect of planning is frequently deciding on a charitable legacy. The following are some important factors that Dawute helps clients with.

Connection: Does the cause represent something significant in their lives? For many, this may be a health issue, a community, or a passion. Credibility: Is the charity transparent and well-managed? Donors want assurance that their donation won't be lost due to poor management or inefficiencies. Continuity: Will the charity remain applicable or operational after the estate is settled? In order to avoid the gift completely failing in the event that one dissolves, we occasionally advise naming two or more organizations. A financial planner and a lawyer should be consulted to make sure the will is correctly drafted and to comprehend the implications for your beneficiaries and estate.

Graham stated: "To make sure their donation will be used as intended, I always advise clients to check the Charity Commissions register.

"You might also think about smaller charities, which frequently have lower overheads than larger organizations, if you want your legacy to have an immediate impact.