- Legacy giving costs the donor nothing in their lifetime and yet it can help protect the long-term future of their favourite causes.
- IHT does not apply to gifts made to charities in your will; they are tax free.
- In addition, from 6 April 2012, if you leave 10% of your estate to charity the tax due may be paid at a reduced rate of 36% instead of 40%
Many people feel that they might like to be more generous to the charities they support, but want to make sure that they have considered all the likely demands on their resources, and have made appropriate plans for their children, parents (if they are still alive) and other dependants and for their own old age.
Legacies should be seen as part of a strategic approach to giving and part of the planning for distributing your assets after you die.
Giving money to charities during your lifetime can be highly rewarding. Most people enjoy being involved with a cause that is close to their heart and seeing their gift make a difference to the lives of those the charity works with.
When someone dies or when assets are transferred to a discretionary trust (a trust whose trustees can choose who should benefit from the trust and how much they should receive) or to a company, inheritance tax (IHT) must be paid if the estate or the value of the assets transferred is more than the tax threshold. The tax threshold 2012-2013 tax year is £325,000 and will remain so until 2014-15. This threshold takes account of gifts, other than certain small gifts, made in the last seven years as well as those made when you die.
IHT does not apply to gifts made to charities in your will; they are tax free.
In addition, from 6 April 2012, if you leave 10% of your estate to charity the tax due may be paid at a reduced rate of 36% instead of 40%.
In order to qualify for the reduced rate you must leave at least 10% of the net value of your estate to a qualifying charity (an organisation recognised by HMRC as a qualifying charity for Inheritance Tax purposes). You can check this by asking the charity to confirm that it has an HMRC charity reference number.
The net value of your estate is the sum of all the assets after deducting any debts, liabilities, reliefs, exemptions and the nil-rate band.
To see how much you need to leave to charity to qualify or whether your estate can pay a reduced rate of Inheritance Tax because of a charitable donation left in a will, you have to work out the value of each of the separate parts of an estate. These are known as 'components’ and are broken down as follows:
- assets that you own jointly with someone else that pass by 'survivorship'
- assets in trust
- assets that you own outright or as tenants in common with someone else
HMRC's technical guidance includes an example of the wording of a clause that can be included in a will to ensure that it will always meet the ten per cent test.
There are several different ways of leaving money to charities in your will:
- Pecuniary: A fixed sum of money.
- Specific: You may wish to leave a particular item (such as jewellery, furniture, shares or property). Gifts of works of art may be left directly to art galleries instead of paying tax. This means that more of your inheritance tax bill is settled than if the work was sold and the proceeds used to pay the tax. However, if you are considering making a non-financial gift, it is extremely important that you contact the organisation you propose to give it to, to discuss your plans.
- Residuary: The residue is what is left of the value of your estate after all the specific bequests (gifts) have been met and all debts and administration expenses have been settled. You could leave the total residue, or a share of the residue, to one or more charities.
If you have set up a charitable trust, it can be a beneficiary of your will, and no inheritance tax will be due on the amount given to the trust.
If you have already made a will, you can still add another legacy by drafting a codicil. This is a separate legal document which adds to or amends the will you have already made. It should be kept with your will.
Another approach is to set up a ‘Legacy account’ with a donor advisory organisation, such as the Charities Aid Foundation, Stewardship or your local community foundation. In this case, you name the donor advisory organisation as the beneficiary of the amount you want to leave, and give them a signed list of the charities you want to benefit, and the amount they should receive.
This list is your letter of wishes. You can change it as many times as you like, simply by writing to the organisation. Unless you want to change the total amount given, you do not need to change the will itself and will not have to pay any legal costs.
After your death, the money you have left to the Legacy account will be paid by your executors into the account. The organisation will then distribute your gifts according to your wishes.
There may be a small administrative charge for this service, which is taken when funds are received from the estate.
The process of making a will:
- We would always advise you to use a solicitor when making your will. Many charities have expert legacy departments that can guide you on the process. In any case, it is a good idea to contact them if you are considering a substantial bequest.
- A useful starting point is to make a list of all your assets and estimate how much your estate is worth. This is the net figure of all your assets, less any debts or mortgages which will have to be paid.
- You should then make arrangements for those closest to you, and consider any other demands on your estate, before thinking about giving an amount or share to any causes you would like to support.
- You can use the HMRC reduced rate calculator to determine how much you need to give to a qualifying charity to reduce your inheritance tax to 36%.
- When you have decided what you would like them to receive, your solicitor will explain the best way to make sure that your will sets out exactly what you would like to happen.
- We would advise you to appoint at least two executors in your will. They are responsible for making sure that your wishes are carried out after your death. They may be friends or family members, as well as a professional adviser such as a solicitor.
- HM Revenue & Customs (HMRC) leaflet, HMRC Inheritance Tax: Customer Guide, is a useful guide to inheritance tax. Remember A Charity also provides some helpful information for individuals who wish to leave a charitable legacy in their will. Another resource is the Society of Trust and Estate Practitioners (STEP), a global membership organisation.
Every donor’s situation will be different and we strongly recommend that you seek professional advice in relation to inheritance tax.
A version of this article, written by Philanthropy UK, was published in a previous edition of A Guide to Giving (2008).