The inheritance tax impact of Remembering a Charity

Blake Morgan is proud to support Remember A Charity week, which runs from 9 – 15 September. Now in its 10^th year, Remember a Charity continue to raise awareness of how legacy giving supports the valuable work charities do. They also campaign to encourage and simplify tax breaks on charitable giving, which is extremely important in order to encourage people to remember a charity in their Will.

Remember A Charity in its submission to the Office of Tax Simplification (OTS) highlighted the importance of the tax breaks in encouraging charitable giving.  The OTS had been asked in January 2018, by the then chancellor, Philip Hammond, to review a wide range of aspects of Inheritance Tax (IHT).  The OTS invited the reviews of the public and organisations.  On 5 July 2019 the OTS published its report “Inheritance Tax review: Simplifying the design of the tax” (1).   Whilst they made 11 recommendations, mainly in relation to lifetime giving they had no plans to reform charitable giving.  Let us therefore recap the law in this area.

If you give to a charity, Community Amateur Sports Club, or a qualifying political party in your Will or during your lifetime, then no IHT is payable on the gift.

Since 2012, if you leave at least 10% of your net estate to charity then not only is the gift to charity exempt from IHT,  but if IHT is payable on the remainder of your estate then instead of the rate of tax being 40% a reduced rate of 36% applies.  In its report the OTS stated that they heard that this recently introduced relief is not well understood and that it is complicated to establish whether the reduced rate applies.

To determine if the 36% rate applies, the estate must be divided into 3 components (1) assets passing by survivorship (2) assets held in trust and (3) the free estate.  You then need to calculate an amount for each component to see if the reduced rate applies.  See the IHT Reduced Rate Calculator on the Revenue website. The OTS didn’t make any recommendations to reform or simplify the 36% rate as it is was considered to be too early.

Ensuring that a Will meets the 10% test is complex, but the Society of Trusted Estates and Practitioners (STEP) of which some of my colleagues and I are members, provides a model clause that can be used by persons wishing to leave a legacy qualifying for the reduced rate of inheritance tax.  As was anticipated with the introduction of the 36% rate, charitable legacies are often being increased after the testator’s death though a Deed of Variation to ensure that the gifts to charity meet the 10% threshold.  Lay executors may not be aware of, or misunderstand the rules in relation to the reduced rate and therefore miss out on the opportunity to give to charity whilst also saving IHT.

As campaign supporters, we pledge to ask our clients the question “Would you like to leave a legacy to charity in your Will?”.  Statistics show that when solicitors ask this question, the number of legacy gifts can double (2).  As legacy giving is a vital source of funds for the work of many charities it is imperative that we keep asking that question and you keep giving.

For more information contact a member of our Succession and Tax Team.

(1) OTS Inheritance Tax review: Simplifying the design of the tax

(2) Applying behavioural insights to charitable giving