The climate surrounding COVID-19 over recent months has changed the way our society works, and for many, the sight of Captain Tom Moore (and others like him) raising large amounts of money for charity may well be one of the defining images. What has not changed are the options that we all have to benefit charity through estate planning, and this article will look briefly at some of the options which are available.
It has long been a characteristic of UK Inheritance Tax law that any money passing to a registered UK charity, whether through a lifetime gift or as an inheritance following someone’s death, is exempt from Inheritance Tax. Where wills are concerned, a charity can either receive a legacy of a fixed sum or possibly a share of the residuary estate, depending on the testator’s wishes. If the residue of an estate is split between a number of beneficiaries, some of whom are charitable and some of whom are not, there can be a number of other Inheritance Tax considerations that come into play concerning the burden of the tax after the charity exemption has been taken into account. Should the reduced tax bill be split equally by all of the beneficiaries (including the charities) or should the tax only be paid by the non-charitable beneficiaries instead? Any will dealing with these circumstances would need to be clear on this point, or it may be preferable to divide the estate in such a way that the charities receive legacies and the individual beneficiaries receive the residue (or vice versa) so that the residue is not split between charitable and non-charitable beneficiaries.
For deaths on or after 6 April 2012, the Government introduced a new lower Inheritance Tax rate of 36% provided that, in simple terms, 10% of the residuary estate passes to charity (though inevitably the rules are more complex than this). Some individuals may therefore consider increasing the amount that passes to charity in their wills so that they reach the 10% threshold specifically to obtain the lower tax rate on the balance of the estate, although it must be remembered that as the amount that passes to charity increases, the amount which passes to other beneficiaries will decrease. That said, and where individuals already have wills in place leaving at least 4% of their estate to charity, it may be beneficial to increase the share of the estate that passes the charity up to 10%. Whilst the value of the estate passing to the other beneficiaries will fall, this will be offset by the reduction in rate of Inheritance Tax so that the residuary beneficiaries do not lose out overall (and may sometimes take slightly more depending on the figures). For individuals who have wills leaving less than 4% of their estate to charity, the position is different as, by carving out a share of the estate to charity, the residuary beneficiaries will still take a little less, even after the reduced rate of tax is taken into account.
It is also worth bearing in mind that charities can also benefit by way of a post death variation as well. In other words, even if no charity is referred to on the face of the will or under the Intestacy Rules (if there is no will at all), the beneficiaries of the estate could execute a variation whereby they carve out some charitable legacies if they wish to do so. Such legacies are read back for Inheritance Tax purposes as if they were made by the person who has died, which means the charity exemption again comes into place and, if at least 10% of the estate passes to charity, the reduced rate of tax might also be applicable as well.
By way of illustration, I dealt with the administration of the estate of two brothers who both died in their seventies, within a year of each other. The first brother left all of his estate to the surviving brother and when the surviving brother died, he left all of his estate to charity (neither brother had ever been married or had any children). When the first brother died, an inheritance bill of approximately £220,000 arose as the estate passed to the surviving brother. However, after the second brother died, the charities agreed to execute a deed of variation whereby the estate of the first brother was redirected straight to those charities so that they ended up inheriting both estates outright. The practical result was that both estates fully benefitted from the charity exemption and all of the Inheritance Tax that had been paid in the first estate was refunded as a result. The charities inherited both estates with no Inheritance Tax liability whatsoever.
The charity exemption for Inheritance Tax purposes is one of the most valuable exemptions that can be used, and it is well worth considering whether charities should benefit through a Will or from lifetime gifts as a result.