There is no reason to be cynical about the new reduced inheritance tax rate for charitable benefactors. Despite what some sceptics are saying, the new rules will benefit people who make wills by giving them greater control over where their hard-earned money goes when they die.

It is true that if you leave more money to charity, less is available for your family. However, the reduction in inheritance tax going to the HM Revenue and Customs is significantly greater. By choosing to take advantage of the lower rate, the net result is that more of your money is going where you believe is important. You do not have to leave your 10 per cent to a big national charity – it could be a local hospice or even a local football club. The two examples below demonstrate how the rules will work in practice.

Bradley and Nicole

Bradley is a hedge fund manager working in the City of London. He earns £1.5 million per year plus bonuses. He owns a large house in Islington worth £2 million where he lives with his girlfriend and their baby daughter. Bradley is killed in a car accident, leaving an estate worth £6 million to his girlfriend and parents.

After deduction of his nil rate band and his funeral expenses and credit card debts , his executors are left with £5.65 million.

If he hasn’t left anything to charity, the entire amount is subject to inheritance tax at 40 per cent. There is no spouse exemption available to his girlfriend because they are not married. His tax bill would be £2.26 million and his beneficiaries would get £3.39 million.

If he left 10 per cent to Save the Children, the balance of his estate is taxed at 36 per cent so his tax bill will be £1,830,600. This is a difference of nearly £430,000. His beneficiaries would share £3,254,400, which is a difference of £135,600.

Nicole is managing director of an exclusive private bank with a net worth of £12 million. She dies of cancer aged 55. She never married and her will leaves everything to her nieces and nephews and godchildren.

After deduction of her nil rate band and funeral expenses her executors are left with £11,630,000 to deal with. With no charitable legacy, Nicole's inheritance tax bill is over £4.6 million as the entire amount is taxed at 40 per cent. Her young beneficiaries are left with just under £7 million between them.

If she left 10 per cent to various sports clubs of which her young beneficiaries are members, the rest of her estate would be taxed at 36 per cent, giving her a tax bill of just under £3.8 million. Nicole's tax bill is reduced by about £1 million and the amount shared between her beneficiaries is still just under £7 million.

Charity that makes financial sense

Some naysayers have argued that the rules will make no difference to charities or, worse, that giving may be reduced. They are worried that if you put charitable legacies in your will, you will stop giving to charity in your lifetime. They are also worried that you might be tempted to leave a legacy of just 10 per cent when in other circumstances you might have left more.

I do not agree with this at all. In my experience, those who are charitably-minded will continue to be so regardless of tax advantages or anything else. But importantly in this difficult economic climate, I think this initiative will in fact attract new givers who have heard “Big Society”-message. Kingsley Napley has already received enquiries from clients who had not considered charitable legacy before now wanting to amend their wills or make their first will to take advantage of the reduced tax rate. These clients tend to be City professionals – not the traditional charity donors. They clearly recognise the advantages of seeing more of their money going to the charity of their choice and less to the HMRC, even if it means their family will get a bit less too. And they want to do their bit to give back in a way that makes financial sense.

Another attraction of the scheme is that wills don’t have to be completely rewritten to fit the new rules. Clients can ask their solicitor to prepare a simple codicil amending their will to add a charitable legacy. In fact, there is no need to wait until after next year’s budget when the rules become law: solicitors can draft a new will or codicil now ready for when the rules change.

In my view, the new reduced tax rate will put charity to the front of everyone’s mind when they are thinking about their will. This can only be a good thing for charities in the UK. But it can also be a good thing for everyone else.