New opportunities for charitable giving

23 August 2017

The recent case of Illot v. Mitson highlighted the fact that many people do give to charity and choose to do so in their Wills even if they have had no relationship with a particular charity or charities during their lifetimes.

Whilst there are many factors which affect an individual's attitude to charitable giving, there are some recent developments in Inheritance Tax (IHT) law which may impact on their choice of charity and how much to give.

Impact of charitable legacies on IHT rate

Generally, under UK tax law charitable gifts are exempt for tax purposes. However in 2012 the Finance Act introduced a provision where you could give a legacy of 10% or more of your estate to a charity and then qualify for a reduced rate of inheritance tax on your estate from 40% to 36%. Although it does not sound like a huge reduction, in fact in many cases it can make the difference between paying IHT or not paying it at all. Under this regime an individual who intends to leave a significant sum to charity could increase the amount their non-charitable beneficiaries receive after tax if at the same time they increase the charitable gift to 10% of the net taxable estate. 

Whilst this relief has been available for some time, the recent introduction of the 'residential nil rate band' will mean that the relief needs to be considered in a new light.

By 2021 the total amount of the inheritance tax exemption to apply to a married couple could be up to £1m. This means that there will be more estates where there is a real incentive to consider the application of the 10% gift to charity. 

If the individual has not made a Will which has taken advantage of the 10% gift to charity, it is always worthwhile for the Executors to review the estate after death. If appropriate, it is possible to introduce a charitable legacy into the estate, or indeed increase a charitable legacy if it is already there, by way of a Deed of Variation. An individual may perhaps have given quite a significant gift to charity but it is not quite enough to reach the 10% limit. By increasing that legacy there could be significant tax savings and benefits both to the charity which will get a larger gift, and also to the non-exempt beneficiaries.

How is charitable giving connected with the new Residential Nil Rate band?

Many individuals will not be able to benefit on the face of it from the new residential nil rate band because their estates are over the £2m threshold. However, carefully considered lifetime planning and gifting to charities can make an impact here too.

By making significant lifetime charitable donations, an individual could potentially reduce their estate to below the £2m threshold. If they are able to achieve that then they would be able to benefit from the residential nil rate band. Potentially, this could mean getting two additional tax exemptions of £175,000 each i.e. £350,000 to set against the combined estates of a husband and wife, together with the combined nil rate band exemption of £650,000.

Making a lifetime gift also means that a charity can claim Gift Aid (provided that the donor makes a Gift Aid declaration). This is not available on death. The charity benefits considerably, as it is able to reclaim the basic tax paid on the donated amount (i.e. 25p for every £1 donated). Higher-rate tax payers who make charitable donations also benefit, as they are able to reclaim the higher rate elements themselves.

Consideration of these charitable giving options is a mathematical exercise that should be undertaken by both the client and the advisor when preparing Wills and discussing tax planning and also as part of the administration of an estate. It is possible, by use of charitable giving either during lifetime or on death, to dramatically reduce or eliminate the inheritance tax on the estate for the benefit of the charity and the ultimate beneficiaries.

The content of this article is for general information only. For further information please contact a member of our Private Client Team. Law covered as at August 2017.