Charitable gifting in Wills – inheritance tax benefits and practical options

Charitable gifting is often a key consideration for individuals when it comes to estate planning. Providing for charitable gifts ensures that an individual can support causes close to their heart, whilst also potentially utilising tax advantages that can come with this.

Our recent article outlined the IHT benefits of giving to charity on death. We now set this out in more detail.

The standard 40% rate of inheritance tax (IHT) applies to an individual’s estate at date of death once all exemptions and reliefs have been applied. These exemptions and reliefs are wide ranging and can include any available nil-rate band allowances and residence nil-rate band allowances. In addition, any gifts to eligible charitable entities can benefit from the charity exemption from IHT. This means that there is no IHT on funds which pass to eligible charities.

Under current legislation, there is also the ability to make use of a reduced 36% rate of IHT in some circumstances. Broadly, giving at least 10% of your estate on your death to charity will enable your estate to claim this reduced rate. This charitable giving must also qualify for the charitable exemption from IHT.

Overall, this means your estate pays less IHT and you can pass funds tax efficiently to charity.

It is worth noting that new legislation has recently taken effect which has tightened the eligibility rules for the charity exemption. Our recent article sets out the new key requirements for the charitable exemption to apply.

Taking that into account, there are several options available to individuals seeking to make use of this option:

New registered charity/foundation

An individual can set up their own charity during their lifetime. This can be an operational charity, or, for example, take the form of a grant making foundation.

A new charity can be structured in a variety of ways, for example it can take the form of a Charitable Company, a Charitable Incorporated Organisation (CIO) or Charitable Trust. It must have a governing document which sets out the administrative rules for the charity and details its charitable purpose. There are different advantages and disadvantages of each charity structure, and our Charities team can discuss the most appropriate structure for any proposed charity and the process of registration with the Charity Commission.

The Charities Act 2011 mandates that a charity must advance recognised charitable purpose(s). These can include, amongst other recognised purposes, the prevention or relief of poverty and the advancement of education, religion, health, community development, arts and culture, human rights or environmental protection.

A charity’s purpose must also be for the “public benefit”. This broadly means that the organisation must benefit the general public, or a large enough section of the general public. A charity set up to benefit individuals based on their relationship to the charity’s founder will typically not be deemed to be for the public benefit.

A donor advised fund

A donor advised fund is a registered charity in its own right which distributes funds to other charities or projects which advance charitable purposes under English and Welsh law. A donor can make gifts to the fund during their lifetime and on death without having to undertake the administrative requirements involved in setting up a bespoke charity. The donor can request that grants are made to other charities from the fund and can ensure that family members are engaged so that involvement in the fund can continue after death.

This structure offers the ability to gift a lump sum to a single entity alongside wishes for its long-term distribution to multiple charities or projects. They can be set up and run for many years, including with the involvement of the next generation. The trustees of the Donor Advised Fund do retain ultimate discretion over funds, but the donor can provide wishes to the trustees in respect of how they would like the funds to be used and distributed towards charitable purposes.

Because the donor advised fund is itself a registered charity, the gift of a lump sum representing 10% of an estate on death will entitle that estate to a reduced rate of IHT.

Specific established charities

Legacies to established qualifying charities will also qualify as a charitable gift which can attain the charity exemption. Please see our recent article on charities that qualify for the exemption.

A mix of the above

There is no one-size-fits-all approach, and it is very much possible to make gifts to multiple charitable organisations, with established charities benefitting alongside a bespoke charitable foundation. The key point is whether the total charitable giving at death meets the 10% threshold required for the reduced IHT rate.

Practical steps

Will drafting

Our Wills and Estate planning team are very much on hand to assist with discussions as to Will structuring and IHT planning, alongside proposed charitable gifting.

For instance, charitable legacies in a Will that already come close to 10% of an individual’s estate can be formulated to ensure that the correct threshold is achieved and the resulting reduced rate of IHT applies on death. However, care also needs to be taken to ensure that an individual is comfortable that the level of charitable giving on death may change as it would be linked to the value of their estate on death.

How we can help

If you would like advice on reviewing the provisions in your Will, making a charitable lifetime gift, or assessing whether an organisation or trust qualifies for the IHT charity exemption, please contact our personal tax and succession team or charities team.