Charities rely heavily on donations from supporters. Many supporters choose to benefit a particular Charity by making donations in their lifetime. You can also benefit a Charity on your death by including a gift in your Will.
What is a Charity?
A Charity is a non-profit organisation that is established for charitable purposes. For an organisation to be considered a Charity it is a legal requirement that the organisation has charitable purposes only. It cannot therefore have some purposes that are charitable and some that are not. The purpose of a Charity is usually set out in the objects clause of its governing document. Charities can have a number of different objects or purposes, but it is a requirement that the Charity is established exclusively for public benefit.
Charities bring together people who care about a common cause. Whatever it is that you care about, it is likely that there will be a Charity working on that cause, whether it be offering and providing direct help, research, raising awareness etc.
There were no less than 168,850 Charities operating in England and Wales (as at March 2023). This is less than the previous year when there were 170,383 Charities operating in England and Wales.
What can I gift to Charity on my death?
If you would like to benefit a Charity in your Will, you could choose to gift one of the following:
- A fixed sum of money, known as a pecuniary legacy. Pecuniary legacies can be index linked, which means they are linked to inflation and can therefore retain its value.
- An item of your personal belongings.
- The residuary estate, which is what is left after all other gifts have been made and expenses of the estate have been settled.
Are gifts to Charity subject to Inheritance Tax?
Inheritance Tax (IHT) is payable when the value of the net estate exceeds the IHT threshold known as the nil rate sum, after all available exemptions and reliefs have been applied. The value of the estate below the threshold is not subject to IHT, but the value of the estate over the threshold is subject to IHT at a rate of 40%.
All gifts to charities are exempt from IHT regardless of the amount whether they are made during a person’s lifetime, or on death by their Will. Consequently, you can give as much to Charity as you see fit without any IHT being payable on the proportion of the estate passing to Charity. This could reduce the overall IHT payable on the estate, as the gift to Charity would be deducted from your estate before the IHT is calculated.
It is therefore possible to reduce the IHT payable on your estate by gifting a proportion of the estate to Charity.
What is the Reduced Inheritance Tax Rate?
IHT is usually charged at a rate of 40%. To encourage charitable gifts on death, if you leave 10% or more of the ‘net value’ of your estate to Charity this will reduce the IHT rate payable on the remainder of the estate from 40% to 36%. The net value is the total value of the estate less the liabilities and expenses.
If a gift to charity falls short of the 10% baseline amount it might be possible for the beneficiary to increase the gift to charity, by way of a Deed of Variation, so that the lower rate of IHT 36% applies to the rest of the estate.
How do I Include a Gift to Charity in my Will?
When a Will provides for a proportion of the estate to be gifted to Charity it is important for the Will drafter to search the Charity Commission register to ensure the Charity’s full name, registered address and registered charity number are referred to.
When a Will is drafted and the residuary estate is divided between exempt beneficiaries (such as charities) and non-exempt beneficiaries (such as individuals) it is important to consider which beneficiaries you want to bear the IHT payable, and that the Will is drafted accordingly.
There are two different approaches to this issue, illustrated by the following two cases:
Re Benham – In this case it was decided that the gifts should be calculated after the deduction of IHT. This is more beneficial for the non-exempt beneficiaries as they share the burden of IHT along with the exempt beneficiaries and therefore receive a larger sum. However, this results in more IHT being payable and the exempt beneficiaries receiving a smaller sum.
Re Ratcliffe – In this case it was decided that the gifts should be calculated before the deduction of IHT. This approach is more beneficial for the exempt beneficiaries as they will receive a larger gift. The result is less IHT is payable and the non-exempt beneficiaries would receive a smaller sum.
The two different approaches provide very different results for the overall IHT payable on the estate and for each set of beneficiaries and it therefore extremely important to consider this carefully and ensure your Will is drafted in the correct way to reflect your wishes.
It is most important to seek specialist legal advice to ensure you receive the correct advice regarding the preparation of your Will and to ensure that your Will is drafted correctly to carry out your wishes.
Perhaps you might like to consider benefiting certain charities close to your heart in your Will. If you need any help whatsoever regarding the preparation of your Will, or if you would like to hear more about gifting to charities in your Will then please feel free to contact us here at Thornton Jones.
There are so many charities with such worthy causes. At this time of year, with Armistice Day fast approaching, it is a good time to recognise the wonderful work undertaken by The Royal British Legion. Should you wish to read more about the fabulous work they do and/or if you would like to leave a donation, please follow the link https://www.britishlegion.org.uk/
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About the Author
Joanne joined Thornton Jones Solicitors in May 2022, bringing a wealth of experience to our Private Client department.
Since qualifying as a Solicitor in 2009 Joanne has worked in the private client sector and has become a specialist in many areas of non-contentious private client work, particularly Wills, Estate Administration, Lasting Powers of Attorney, and Court of Protection applications.
After leaving her hometown to study at University and Law School in Surrey, Joanne returned to her roots here in Yorkshire to settle down and loves being able to work within the local community and helping local people.
There are never two days the same in the life of a private client lawyer and I enjoy the variety of work. I enjoy helping people from all walks-of-life deal with a variety of legal matters, often during extremely emotionally challenging times.
At home Joanne is kept more than busy with her daughter, her dog and her tripod cat. Any free time she has, she enjoys long walks with the dog, socialising with friends and family, dreaming of holidays in the sun and being an Alzheimer’s Society Dementia Friend.
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