Last March, the widely loved Paul O'Grady died, leaving provisions in his Will for charities and £25,000 in respect of each of his animals for their upkeep and maintenance. While Mr O'Grady was known for his love of animals and work with charities, was this also efficient tax planning for such a large Estate.
Estate planning, in life and in preparation for death is a cornerstone in ensuring our hard-earned assets reach their potential in life but find their intended destination after we're gone. A key roadmap, amongst others, to reach this aim is a Will.
Why is donating to charity in my Will beneficial?
Donating to charity in your Will can create a lasting impact for causes that resonate deeply with you and provide for those who really need it. It could be a way to ensure your legacy extends beyond your lifetime and contributes to the betterment of society. Moreover, the tax advantages associated with charitable bequests are worth considering as to reduce the tax liabilities for those left behind.
HMRC date has recently revealed that £7.5billion in Inheritance Tax was paid to the Treasury in the 2023/24 tax year.
What Inheritance Tax reduction could my Estate receive?
For those who leave 10% or more of their net estate to charity, a lower rate of Inheritance Tax (36% rather than 40%) is available. If you gift specific legacies to charities and other exempt beneficiaries such as for national purposes, political parties and heritage maintenance funds, you could reduce this liability further.
For example: Ben was a boat salesman, Ben's net estate is calculated to be £1million. Below is an example of how, by increasing Ben's charitable gifts from 6% of his net estate to 10%, savings in Inheritance Tax liability that could be made:
| Charitable gift A (6%) | Charitable gift B (10%) | |
| Charitable gift value | £40,500 | £67,500 |
| Value tax is paid on: | £634,500 (@40%) | £607,500 (@36%) |
| Amount of Tax payable: | £253,800 | £218,700 |
| Balance for distribution as per Ben's Will | £705,700 to chargeable beneficiaries and £40,500 to charity | £713,800 to chargeable beneficiaries and £67,500 to charity |
This example is purely hypothetical and for illustration purposes only and further calculation is needed for an official value.
However, depending on how your Will is drafted will depend on whose share ultimately takes the burden of the Inheritance Tax liability. If your remaining Estate is to be divided amongst those whose share is to pay Inheritance Tax (e.g., friends and family) and those whose is not (e.g. charities), you must think about how your Will is drafted. This will change how much each beneficiary will receive. Please contact us for more information on this if required.
If a Will is also varied within two years of death to allow for this, there could be a large Inheritance Tax rebate from HMRC.
What is a 'charity'?
For an organisation in England and Wales, the general rule is that it must be registered with the Commission and or HMRC to benefit. This could also include registered community amateur sports clubs.
Cancer Research UK reported that for the financial year ending March 2023, 'legacies were the largest single source of income for the charity at £261m[illion]'.
How do I refer to a charity in my Will?
It is important to identify your intended charity clearly for a few reasons:
- It could lead to tedious arguments between charities.
- Different charities, especially those doing similar things, might have similar names that are easy to mix up.
- Charities often have a different name to which they use every day, which might not be the same as their legal name.
- Charities sometimes change their name or join with other charities.
- You may have intended to help a smaller local branch of a charity, not the big parent charity it is part of.
If a charity is registered, you can check its details and charity number in the register of charities kept by the Charity Commission for charities in England and Wales. But remember, not all charities have to register, so not being on the list doesn't mean they're not a charity.
Additionally, when people leave money to charities in their Will, usually, they do not state how the charity should use it. However, you may want to state exactly what the charity should do with the money, like paying for a specific project or research. But the purpose chosen must fit with what the charity is already meant to do. However, charities usually prefer to receive money without strict rules because the charity's focus might change over time, and these rules could become hard to follow.
If you wanted to donate with stricter rules, it is a good idea to talk to the charity about this first. The charity may receive the money many years after the Will is drafted, it is therefore important to make sure they can still follow your request later. The charity may prefer if the rules are in a letter that's not legally binding, so they have more flexibility.
Conclusion
Integrating charitable giving into your Will offers a multitude of benefits, extending beyond tax advantages. To ensure your intentions are carried out effectively, it is essential to seek guidance from legal professionals to help navigate the complexities of Will drafting and maximise the benefits of charitable contributions.
Estate planning goes beyond just financial considerations, leaving a charitable legacy could leave a positive imprint on the lives of others for years to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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