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My talk on charitable giving, inheritance tax, and SIPPs

A SIPP is a self invested personal pension plan.

My 19-minute talk covers three issues that are central to my finances. They will be relevant to many others.

Summary

Presented on 23 May 2020. Posted 4 June 2020.

The Samuel Blythe Society exists to acknowledge and celebrate the generosity of all those who intend to leave a gift to Clare College in their will. I became a member several years ago, and have attended its annual lunch several times, which is followed by talks given by Clare fellows and graduate students.

This year the lunch was cancelled due to the COVID-19 pandemic. However the society organised a virtual event using Zoom. I gave a short talk with the title "Some tax aspects of SIPPs and charitable giving."

You can watch it below. This page also contains some of the tables of calculations and some additional material.

The footer of every page of my website contains a disclaimer of legal responsibility. That is of course even more relevant for this subject than it normally is.

Video

Presentation outline

The slides

I am happy to share the original PowerPoint slide presentation.

How the presentation was recorded

My first presentation recording was done on the spur of the moment, just putting my iPhone 6 on the table and relying on its built in microphone. See my page Lecture: The Quran recognises religious freedom.

Once I found recording presentations worthwhile, I purchased a high quality Sennheiser digital lapel microphone which plugs into the lightning port of my iPhone. That produces a much better recording.

Some of the tables of numbers

I recommend readers downloading the slides to review the numbers more easily. However I have also reproduced some of the key tables of numbers below.

Slide 11 - Cash donation to charity with gift aid

Your tax rate

Your tax rate

Your tax rate

Charity

20%

40%

45%

Cash given

-8,000

-8,000

-8,000

     8,000

Gift aid refund to charity

     2,000

"Grossed up" gift

10,000

10,000

10,000

Extension to basic rate band

10,000

10,000

10,000

Effective rate of tax relief

0%

20%

25%

Tax saved

-

2,000

2,500

Cost to donor / benefit to charity

-8,000

-6,000

-5,500

   10,000

Benefit ratio
Charity benefit / post tax cost

1.25

1.67

1.82

Slide 33 - Effect of leaving 10% to charity

No gift to charity

10% of taxable estate given to charity

Estate

425,000

425,000

Nil rate band

-325,000

-325,000

Taxable estate (before charitable gifts)

100,000

100,000

Gift to charity 10%

-10,000

Taxable amount

100,000

90,000

IHT rate

40%

36%

IHT payable

-40,000

-32,400

Estate

425,000

425,000

Gift to charity

0

-10,000

Children's inheritance

385,000

382,600

Children are down

-2,400

Charity is up

10,000

Benefit ratio

4.17

Simple algebra shows that leaving 10% of your taxable estate to charity always costs your children only 24% of the amount the charity receives.

Download the algebraic proof here.

Slide 35 - Giving 4% or 10% to charity

This table illustrates a very striking point.

If you already planned to leave 4% of your taxable estate to charity, increasing that to 10% does not cost your children a penny. The entire extra gift to charity is compensated, in full, by the inheritance tax saving arising from increasing the charitable gift.

On the figures below, the charity receives an extra £6,000 while the children's inheritance stays the same.

4% of taxable estate given to charity

10% of taxable estate given to charity

Fraction of taxable amount given to charity

4%

10%

Estate

425,000

425,000

Nil rate band

-325,000

-325,000

Taxable estate (before charitable gifts)

100,000

100,000

Gift to charity 4% or 10%

-4,000

-10,000

Taxable amount

96,000

90,000

IHT rate

40%

36%

IHT payable

-38,400

-32,400

Estate

425,000

425,000

Gift to charity

-4,000

-10,000

Children's inheritance

382,600

382,600

I explained during the presentation while I was speaking to Slide 34 (starting at the time of 17:39) that the nearer to 10% your originally intended charitable gift, the greater the impact of increasing that to 10% of the free estate.

To illustrate the point, assume that you originally intended to leave 9.9% of your taxable estate to charity, which on the above figures would be £9,900. After deducting inheritance tax and deducting the charitable gift, your children would receive £379,060.

If you increase the charitable gift to 10%, which is £10,000, the charity will receive an extra £100. However your children's inheritance increases from £379,060 to £382,600 as a result of the reduction in the inheritance tax your estate pays. (Readers can check the calculation for themselves using the structure of the above table.)

Once you leave more than 10% of your taxable estate to charity, every extra £1,000 you leave to the charity will cost your children £6,400. (This is 64% of the gift, since 36% of the bequest would otherwise have been paid in inheritance tax. Your children only inherit what is left after paying inheritance tax.)

Concluding comments

Reading the above tables does not substitute for watching the presentation.

In particular, if you have a SIPP of reasonably large size which contains drawdown funds, you should consider well ahead of your 75'th birthday whether you face paying any tax under the Lifetime Allowance rules which are explained in the presentation.

 

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