Legacies
Charitable Gifts in Will Drafting and Estate Administration Leaving money to a charity in a Will is a great way for people to leave a lasting legacy for a charity particularly close to their hearts, and to save inheritance tax at the same time.
Types of charitable giving in Wills Pecuniary legacy Leaving a pecuniary legacy is the simplest way of leaving a gift to charity. However, this can be problematic in that the testator is unlikely to be able to predict how a pecuniary legacy will compare with the size of their estate on their death. On the one hand, inflation may mean that the legacy makes up a smaller proportion of the estate than intended (although this can be countered by linking the legacy to RPI or CPI). On the other hand, if the estate is substantially diminished compared with when the testator made his/her Will (for example, due to paying care costs) it may make up a larger proportion than intended. The latter can be countered by leaving a matching legacy to the residuary beneficiaries, so that if the estate is insufficient to pay all of the legacies in full, the legacies can then abate proportionately. Residuary legacy Alternatively, by leaving a fixed percentage of the estate to a charity, this ensures the testator gives the proportion they intend, whether larger or smaller than the sum they have in mind at the time they are making their Will. A minimum and maximum sum can be specified, to keep the legacy within the parameters intended by the testator.
Tax Considerations Inheritance Tax in Will drafting Gifts to UK registered charities (and ‘community amateur sport groups’) are exempt from inheritance tax. When drafting Wills it is therefore particularly important to make sure that the full charity name and registered charity number is stated. It is also important to consider what the testator’s intention is if their chosen charity has amalgamated or ceases to exist at the time of their death. Both in Will drafting and estate administration, also consider that grossing (single or double) may apply where there is a mix of exempt (e.g. charitable) and non-exempt beneficiaries, which means that the non-exempt entitlements may need grossing before the inheritance tax is calculated. Particular care should be given where there is a gift to unincorporated associations which might seem on the face of it to operate for charitable purposes, but are not in fact registered charities. This can also be problematic in satisfying the certainty of object principle, as well as for inheritance tax purposes. Capital Gains Tax and Income Tax in Estate Administration UK registered charities are also exempt from capital gains tax
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and income tax. When dealing with the sale of assets in the course of an estate administration, it is therefore important to consider appropriating assets to charities ahead of the sale to maximise the benefits here. Providing the charities with a R185 certificate allows them to reclaim any income tax paid during the course of the administration.
Reduced Rate of Inheritance Tax It is generally thought that by giving 10% of an estate to charity, it will qualify for a reduced rate of inheritance tax at 36% compared with 40%. This is a more generous provision that it first seems, as in order to qualify for the reduced rate, it is 10% of the baseline amount rather than 10% of the entire estate. Estate Administration This baseline amount is calculated, in simple terms, by deducting the nil rate band (original and transferable) from the net estate at date of death. This means that an estate worth £1,000,000 with one nil rate band of £325,000 available would have a baseline of £675,000, and therefore the 10% would be satisfied if at least £67,500 is passing to charity. Particular care should be given if there are beneficial entitlements which are to be grossed-up, as this will affect the baseline amount. This can mean that even a comparatively small legacy can mean the estate qualifies for the reduced rate of inheritance tax. It can also be worth considering a variation with the beneficiaries, if the sum passing to charity under the Will is close to allowing the estate to qualify for the reduced rate. For example, if between 6-10% of the baseline amount is passing to charity, increasing this sum to 10% can mean the beneficiaries themselves receive the same amount, if not more, because of the reduced rate. Will drafting Formula legacies can be included to calculate the amount required to qualify for the reduced rate of tax. However, in view of the above, in some cases this may lead to less passing to the charity than the testator intends, and therefore it is worth considering with the client whether they wish to include a minimum amount (as above, this can be index-linked).
Conclusion Consider: ■ the merits of a percentage of the estate passing to charity as opposed to a pecuniary legacy ■ the issue of ‘Certainty of Object’ in the context of unincorporated associations ■ appropriating assets to charitable beneficiaries in the course of an estate administration ■ the possibility of claiming the reduced rate even where the 10% entitlement is not expressly stated as such in the Will. HMRC have a helpful calculator for calculating the required sum ■ the possibility of variations with beneficiaries ■ a formula legacy to ensure the reduced rate is secured, in Will drafting
