Workshop: Private client: new charity giving rules

The new inheritance tax rate designed to encourage giving to charity is also an opportunity for solicitors to explore a new source of potential business. This will arise both in relation to wills ? to incorporate charitable gifts ? and in relation to advice about, or the preparing of, deeds of variation ? to vary inheritances to include a qualifying charitable gift.

The new law, passed in July 2012, applies to estates for deaths after 5 April 2012. If at least 10 cent of a net estate is left to charity, the IHT rate on the rest goes down from 40 per cent to 36 per cent.

Calculating the net estate, leave out anything which benefits from the spouse exemption (outright gifts and qualifying interests in possession) or any other reliefs like business or agricultural property (BPR & APR), and the nil rate band (NRB) exemption. If 10 per cent of the balance goes to charity there's a double tax benefit ? saving 40 per cent IHT on the gift and paying the lower rate of IHT on the rest. ?To take advantage of this, clients may ?want to review both: (1) their own wills, and (2) any inheritance they receive on which IHT is paid.

Reviewing wills

Solicitors could gear up for new enquiries with a standard form codicil, or clause to fit into a will, with a legacy using the appropriate formula for the 10 per cent amount. STEP has a suitable precedent ?but where using a wills publisher, they should have their own wording. Given ?the confusion and uncertainty codicils ?can cause, a new will is always better ?where possible.

An alternative would be a discretionary trust including charities as potential beneficiaries, with clear guidance in a letter of wishes as to the amounts for charity. It could also give some flexibility on charity choice. The distribution would need to be within two years of death to be 'read back into the will' under section 144 IHTA 1984. Those who already have a suitable discretionary trust of residue could simply make a new letter of wishes.

Example:

? The beneficiaries of spinster Dora Jones, who left £525,000, with a full NRB of £325,000, would normally expect £200,000 to be liable to IHT at 40 per cent, with £80,000 tax due.

? If Dora reviewed her will, to leave 10 per cent (£20,000) as a charity legacy, this would reduce the IHT from £80,000 to £64,800. The effective 'cost' of giving £20,000 has been reduced to £4,800.

Deeds of variation

There is also huge potential for those inheriting to vary the terms of a will or intestacy to redirect some or all of their inheritance to charity. This can be done within two years of death (section 142 IHTA 1984). The virtue of this option is that the details of the estate, tax and amounts due will be known.

Example:

(i) If Dora had left her estate to her niece and nephew Ginger and Fred equally, they could make a deed of variation to re-write the will within two years of her death. A legacy of £20,000 would only reduce the total net estate by £4,800.

(ii) If Dora had in fact left 4 per cent of her net estate, i.e. £8,000, to any charity already, Fred and Ginger could increase the charity gift '“ whether to the same or a different one '“ to 10 per cent, i.e. £20,000. It would actually cost them nothing. Increasing the charity gift by £12,000 to £20,000 reduces the tax due by £12,000 as well, so no change to the net amount.

(iii) What's more, if Dora had left a bit more than 4 per cent but less than the magic 10 per cent '“ say, £10,000 here to charity '“ Fred and Ginger would actually increase their net inheritance by making the charity total 10 per cent. Increasing the legacy to £20,000, a cost of only £10,000, reduces the tax by £11,200, i.e. a real increase in the ?net estate of £1,200. Everyone wins '“ except the tax man.

Seizing the opportunity

Solicitors can seize this opportunity at various points:

(1) Wills: to make clients aware of the opportunity to review their wills.

(2) Deeds of variation: to make beneficiaries of your estates aware of the potential to change their inheritance.

There could be standard letters for the 3 situations (i) (ii) & (iii) above, once the relevant percentage could be worked out, or one simpler letter to all.

There are many details '“ it's not always straightforward. The problem is that ?in (iii) the beneficiaries could actually ?be better off, so does that mean that solicitors might become negligent if not giving the advice?

(3) Varying estates of which your ?clients are beneficiaries, even if you ?don't administer.

A few common misunderstandings sometimes need pointing out. Anyone can do a variation themselves, or through their own solicitor ? it doesn't need to be done by the person dealing with the estate. You also don't need the approval of other beneficiaries or the executors. Whichever route is followed, there is plenty of scope in the new rules for solicitors to both help clients and develop additional fees.

Copyright & permissions