Inheritance tax (IHT) is one of the most frequently asked topics we get asked at WillPack, particularly in methods of mitigating the IHT liability. In this edition of Did you know? we will look at making gifts to charity in a will and how this can reduce the total IHT liability.
Background
All UK registered charities are exempt from IHT, therefore gifts made to them are free of IHT. However, this is under the proviso that the gift is absolute without any conditions or otherwise binding wishes. Therefore, a multi-millionaire could gift his entire estate to a UK registered charity without having to pay any IHT.
However, most clients do not have such charitable desires. Instead, they would like their family to inherit their hard-earned fortune, but they do not wish their estate to be charged the standard rate of IHT.
What can be done?
There are some IHT mitigation options available for clients with large estates, however we are going to look at what is available to those who wish to include charities in their will.
If a testator leaves 10% or more of their net estate to a UK registered charity, they would be able to reduce to IHT rate from 40% to 36%. Including an appropriate clause in the will would ensure that those charities will inherit the exact amount from the estate required in order to qualify for the relief. If your clients are looking to benefit from this additional relief, specific reference must be made in the instructions you submit.
The practicality of using this will make the duties of the executors much more difficult, and they would likely require the services of a tax specialist or a probate company to assist.
What if the testator is likely to change which charity will benefit?
There are a couple of options available to them. The first option would be to include a charitable trust in the will. Guided by a letter of wishes, the trustees can set up this trust and distribute the assets as they see fit, as long as this is for charitable purposes. They can do this either by regular payments until the trust is depleted, or in lump sums. Clients wishing to use this option should be made aware of additional costs to the estate in order to set the trust up.
The other option is to benefit the Charitable Aid Foundation (CAF) by using their Charitable Legacy Service. As CAF is a UK registered charity, any gifts to them will be free of IHT. They also can be guided by a letter of wishes (provided during the lifetime of the testator) to further distribute the gift to the chosen charities upon receiving the gift under the testators will.
More information on making gifts to CAF can be found here.
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2 comments
Colin James
10 April 2020 at 11:03 am
A wealthy client wants to leave 80% of his estate to a mixture of individuals and charities and 20% (his residue) to a single charity.
The instructions are to give the gifts to individuals IHT free (to be paid by the estate). There is no instruction to include the charities have pay their own share of any IHT (even after discussion with the client). Thus the whole estate IHT falls upon the residuary charity. Who would the executors charge with any IHT that cannot be paid by the residuary estate. Since the residual charity is more than 10% of the estate could the 36% rate be claimed even though the residual charity receives nothing because the residual gift is taken up by IHT?
WillPack
10 April 2020 at 11:09 am
Unfortunately, we cannot provide technical advice through the website. If you are a WillPack Partner you may request technical support by emailing us at [email protected].
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