The usual 40% rate of inheritance tax will now be reduced to 36% if at least 10% of an individual's taxable estate is left to charity on their death.
Now those who are already charitably minded can leave more of their estate to charity and their family will end up with more. Everyone wins, courtesy of the taxman. The way the new reduced rate is calculated means that if someone is already thinking of leaving at least 4% of their taxable estate to charity, they could increase this legacy to 10%. More then goes to charity but the family will still receive the same inheritance, or more, once the tax reduction is taken into account. The detailed rules are complicated but a well-drafted will should ensure the relief applies.
This is an excellent opportunity for people to save tax and benefit charity and an excellent marketing opportunity for charities. Anyone with a will that includes any sort of charitable legacy should review it to see if they currently benefit from the new relief. If not, then they should consider increasing the size of the charitable legacy so that their estate benefits from the relief, especially as this could even save their family money overall.
Even if someone does not currently make a legacy to charity in their will, it is still worth recommending that they consider doing so, as the actual cost to their family could be far lower than they expect.
For more information, please contact Andrew Goldstone.
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100 of the richest people in Britain donated at least 1% of their wealth in the past year. This is the first time in 11 years of publication of the Giving List that this has occurred.
Overall, donations or pledges from the top 100 philanthropists increased £220 million to £1.89 billion from £1.67 billion last year – a 13% rise.
Despite the encouraging figures, commentators have sounded a cautionary note. Their concern is that these excellent figures were generated in a tax regime that was stable and benevolent, with less claims of tax avoidance being levelled at philanthropists.
Some have also pointed to the US as an example of how even higher rates of giving can be generated where there are more generous tax breaks for philanthropists.
For more information, please contact Andrew Goldstone.
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After coming under sustained pressure from the charity sector and philanthropists the government has abandoned its controversial proposals to cap overall tax relief for individuals at £50,000 or 25% of the individual's income.
Charities had widely criticised the proposed measure, claiming that philanthropists would be discouraged from donating where it would cost them more to do so. Whilst it is true that those who donate to charity are not purely motivated by tax saving, removing the tax incentive for doing so at a time when many charities are either struggling to survive or facing an increased demand for their services did not seem to chime with the government's vision of the "big society".
So the current rules for charitable donations remain unchanged. If a top rate tax payer gives £80 to charity, the charity claims back £20 and the tax payer can claim back £30 in tax relief. The charity ultimately receives £100 but it costs the donor just £50. This reflects the availability of full 50% tax relief on the donation.
For more information, please contact Andrew Goldstone.
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Mishcon de Reya has undertaken a detailed review of over a thousand of its clients’ wills to examine trends in charitable giving.
Legacies
We have looked at the value and type of legacies given to charity, the likelihood of the charity ever receiving the legacy, whether clients prefer to give to multiple charities and which charity sectors are the most popular for our clients.
20% of our clients mentioned charity in their wills but only 11% included a legacy which will go to charity immediately on their death. Half of our clients who mentioned charity in their wills mentioned more than one charity.
This means that only a small proportion of clients include any provision for charity in their will and in half of those cases the legacy is shared between several charities.
Almost half of the legacies to charity were cash gifts and almost half were gifts of part or all of the residuary estate. Although residuary gifts are generally considered the holy grail for legacy officers, what matters most to charities is the value of the legacy and whether they will receive it.
Interestingly, only 1% of clients included a charitable legacy of all or part of their residuary estate which will take effect immediately on their death. That contrasts with 9% of clients who included at least one cash legacy to charity which will take effect immediately on their death.
Most cash legacies were less than £10,000 but 8% were over £50,000. Although cash legacies are generally likely to be less valuable than a share of the residuary estate, a far larger proportion of cash legacies take effect immediately on the testator’s death; 67% as opposed to 9% as set out above. As far as charities are concerned, the old adage “a bird in the hand” may well be relevant.
Only 8% of cash legacies were index-linked but this is something we are trying to increase by routinely recommending index-linking to testators. Gifts of specific items (specific legacies) to charities are unusual and make up just 5% of all charitable legacies. Fortunately, they mostly take effect either immediately on the client’s death or if just one other individual has died before the client (often the spouse in a mirror-will scenario). This may reflect a testator’s strong wish for the charity to receive the specific item. Charities might therefore consider focusing their legacy campaigns on encouraging valuable specific legacies, although only one of our clients made a gift of real estate.
Wills vs Letters of Wishes
There is a move towards will-drafting involving flexible trusts and non-legally binding letters of wishes for reasons of tax efficiency, flexibility and confidentiality. Is this a good thing for charities? Can a charity rely on the trustees’ discretion? Will the trustees always follow the testator’s wishes set out in a letter of wishes that a legacy should pass to charity?
In a professional context, especially where the solicitors or trusted family advisors are also executors, we would ordinarily expect a charitable legacy to take effect if it is set out in a letter of wishes. However, the letter of wishes is not a public document and it can be changed after the client has made their will. Indeed this flexibility and confidentiality means that discretionary trusts with letters of wishes are popular with our clients, but they are not ideal from the point of view of a charity wanting to be sure of a legacy or even to be aware of the possibility of a legacy.
We undertook a review of gifts of the residuary estate in wills and separately in letters of wishes in order to be able to compare the two different approaches.
In wills the most common percentage of residuary estate left to each charity is between 26% and 50% of the estate. 23% of clients making residuary gifts in their wills leave the entire estate to charity. However only 11% of residuary gifts made in wills go to charity immediately on the client’s death and 25% if just one other individual has died before the client (again, often the spouse in a mirror will scenario). As a result only a total of 36% of residuary gifts made in wills are quite likely to reach the charity.
In letters of wishes, by comparison, the most common percentage of residuary estate left to each charity is less than 10% of the estate. Only 8% of clients making residuary gifts in letters of wishes leave the entire estate to charity. Only a tiny number (2%) of residuary gifts made in letters of wishes go to charity immediately, but 72% go to charity if just one other individual has died before the client (again, often a spouse in a mirror-will scenario). This means that 74% of residuary gifts made in letters of wishes are quite likely to reach the charity.
In conclusion, where charities are given residuary legacies under a letter of wishes, they are likely to receive a smaller share of the estate than by a gift in a will, they are more likely to have to share the estate with other charities, but they are also more likely actually to receive the legacy.
Our analysis shows that if a testator has a strong connection with one particular charity then they are more likely to give their entire estate to that charity. Once they begin thinking about more than one charity then the chosen charities are highly likely to have to share the residuary estate with other non-charity beneficiaries (such as the client’s nieces and nephews).
The most popular charitable sector for our clients was health (36% of legacies) followed by religion (12%), children and education (10% each) and animals (8% of legacies).
To view the full report, click here.
If you wish to discuss the findings, please contact Andrew Goldstone or Victoria Turner.