Giving to charity by Will
It has been reported that legacies left to charities in Wills increased 11% last year.
The reasons behind this are probably numerous but undoubtedly the pandemic highlighted the value of charitable work in extraordinary times.
Giving to charity in your Will can be a straightforward process involving an outright legacy. The good news is that the legacy should be exempt from inheritance tax (IHT) due to the charity exemption. It’s important, however, to ensure that suitable provisions are included in the Will so that if the charity is no longer in existence at the date of death, or if it has merged with another charity by that time, the gift does not fail.
Testators with larger estates, say over £1 million, on which IHT will be payable on death, may be interested in taking advantage of the reduced rate of IHT. This is a special rate of 36% (compared to the normal 40%) which is available if the testator gives at least 10% of their net chargeable estate to charity. This is not at least 10% of all an estate’s assets but at least 10% of those assets that are subject to IHT.
For example, Clare is a single woman who has travelled extensively on business during her working life and has never owned a home. Her £500,000 estate is liable to IHT of £70,000. Her chargeable estate is £500,000 less the IHT nil rate band of £325,000, which means the chargeable estate is £175,000. If Clare leaves 10% (£17,500) to charity the legacy will be exempt from IHT and the reduced rate will apply. Clare’s IHT bill will then amount to £56,700, a reduction of £13,300. Clare has made a gift to charity of £17,500, at a cost to her estate of £4200.
Most people’s assets go up and down in value during their lifetime so the gift can be worded so that the amount varies dependent on the size of the estate. Alternatively, the amount given can be varied by Deed of Variation within two years of death to increase the amount given to the 10% threshold provided all the residuary beneficiaries agree. In some cases the consequent reduction in IHT can leave both the residuary beneficiaries and the charity better off.
The tax advantage of Gift Aid can also be obtained by giving a sum of money to an individual by Will expressing the wish that they use it to make a charitable gift claiming Gift Aid on the amount donated. This of course increases the amount the charity receives and can also benefit the person making the gift if they pay income tax at higher rates.
If an individual wishes to leave a substantial amount to charity, they may like to consider setting up their own charitable trust, particularly if is felt that there is no existing charity benefitting the objects the testator has in mind. The testator may also regard a charitable trust as a vehicle for future family giving. If it is not completely clear at the outset what charitable activities the testator would like to support it is possible to set up a charity with general charitable objects and later identify the particular spheres to be benefited. The charity tax exemption from IHT applies to lifetime gifts as well as legacies in Wills and no capital gains tax is payable on gifts to charity. In addition, income taxpayers can claim Gift Aid at their marginal income tax rate on the gift.
Our specialist expertise
Clarke Willmott has several solicitors with experience of charitable gifts and setting up and running charitable trusts. Please contact us today if you would like a free initial consultation about charity gifts.