Few of us are likely to be as wealthy as Bill and Melinda Gates, but many of us might like to replicate, perhaps to a lesser extent, the Gates’s philanthropic wish to use family wealth to benefit others. So how is this desire to help others best achieved?
Gifts in your Will
Figures produced by “Remember a Charity” (a consortium of charities promoting charitable legacies) show that 7% of testators leave a gift to charity in their Will. Despite this low percentage, charitable legacies produce £2 billion of income each year and Remember a Charity cites the fact that two out of three guide dogs are paid for through legacies.
Gifts to a registered charity are exempt from Inheritance tax. In addition, if charitable legacies make up at least 10% of your net chargeable estate, then the Inheritance Tax (IHT) rate applied to the whole of your estate is reduced from 40% to 36%.
This 10% threshold is not as high a bar as it first appears. For example, a single person, who has made no lifetime gifts, with an estate of £800,000 would have to leave charitable legacies of £47,500 in his Will (10% of the value of his estate after deduction of the current nil rate band of £325,000) in order to qualify for the reduced rate. In this example, the inclusion of the charitable legacies would reduce the overall IHT bill on the estate by £36,100 meaning that the total cost to the estate would be £11,400. That’s enough money to train and support another guide dog with a donation of less than 1.5% from the gross estate assets.
If your Will includes charitable legacies that fall short of the 10% threshold, you might consider increasing them as this could increase the amount due to the other beneficiaries as well as the charities. It is usually most tax efficient to leave the charitable gifts until after the death of both spouses or civil partners as the tax bill normally becomes payable on the second death.
Gifts during lifetime
Gifts made to charities during a donor’s lifetime are also tax free and, in addition, Gift Aid will enable the donor to claim tax relief at their marginal rate on the donation. The charity will be able to reclaim basic rate tax on the gift from HMRC, and as this represents the basic rate tax paid by the donor, it is important for the donor to ensure that he or she will have paid enough tax to support the charity’s claim. If, for example, a donor makes a donation of £10,000, he or she will have to have paid £2500 in income tax or they will face a demand from HMRC. If the donor in this example is a higher rate tax payer at 40%, he or she would receive additional tax relief of £2500 when submitting their Tax Return.
Income tax relief is also available on gifts to charities of land and buildings in the UK or shares quoted on the Stock Exchange.
Creating a charitable trust
If you want to do more than make regular donations to charities you might wish to use some of your family wealth to set up a permanent vehicle for your family to benefit a particular sector or a range of good causes. In this situation you might wish to consider creating a charitable trust registered with the Charity Commission. Trusts are charitable if they are set up for charitable purposes and are for the public benefit. Gift Aid can be claimed on donations to the trust and the trust’s income is generally tax free.
Charities are, however, subject to a great deal of regulation so before deciding to start a charitable trust it is important to be aware of all the obligations and regulatory requirements that will be placed on the trustees. Once created, such a trust can be an ongoing source of funding for your preferred causes and a memorial to your family’s philanthropic tendencies.
For further information please contact a member of our private client team.