Passing money to a charity under the terms of your Will has many advantages from an inheritance tax point of view as well as it being a very generous way of leaving a positive legacy. There are many reasons as to why individuals leave their residuary estate or specific legacies to charities.
In this article we will cover why it is a good reason to leave a charitable gift in your Will, how to leave a charitable gift under the terms of your Will and also the Inheritance Tax advantages of doing this.
Why do people choose to leave money to a charity in their will?
An individual may wish to leave a personal legacy when they have passed away as well as the positive impact this will have on a charity when they receive their gift. Charities are run on charity events, donations and individuals’ generosity whether that is during someone’s lifetime, or on death. Without donations, charities would not be able to continue with the positive services they offer.
From an inheritance tax point of view, gifts left to charity under a Will are completely inheritance tax free! This will be discussed in much more detail throughout this article.
How to leave money to charity in your will
There are many ways an individual can leave gifts to charity under the terms of their Will. Firstly, it is important that the chosen charity is legitimate and registered with The Charity Commission. This will ensure that your money is not being misused and instead is being used towards a genuine cause. Secondly, time must be spent in ensuring that the correct legal terminology is used in your Will to ensure that your kind donation is received to the correct charity and the Executor is able to pay the gift. Consideration must also be given if you wish to leave a gift to charity with specific instructions on what you wish this donation to be used for.
Donating a specific sum of money (Pecuniary Legacy)
An individual can leave a specific sum of money to a charity in their Will. Firstly, you would need to decide what charity you would wish to leave this to and also the amount. For example, if someone wishes to leave £1,000.00 to charity, this can be achieved by leaving a pecuniary legacy under a Will. They would need to ensure that the charity’s full name and registered charity number is included. If you wish to leave a pecuniary legacy to charity, no inheritance tax would be paid on the amount gifted.
Gifting a percentage of the estate
There is the option to gift a specific portion of your residuary estate to charity which is known as a residuary legacy. This would mean that after all funeral costs, debts and liabilities are paid on an estate, the charity would be left a percentage of the amount that is left over. If you were to leave 10% or more of your residuary estate to charity and your estate was subject to inheritance tax, this would reduce the inheritance tax rate from 40% to 36%.
Leaving whole estate to charity
An individual could leave their entire estate to charity. This normally happens when an individual has no dependants and wishes to support a cause that is close to their heart. You can leave the whole of your estate to different charities. If you leave your entire estate to charity, there would be no inheritance tax to pay. However, if you have any financial dependants and do not leave them or family members anything under the terms of your Will, this may give rise to a potential claim on your estate. It is recommended to seek legal advice to ensure that all legal complications have been minimised.
Donating a particular asset to charity
Explore how an individual can donate a particular asset to charity in their will, explaining that they can leave specific assets – such as property, shares, or valuable items – by naming the charity as the beneficiary of that asset in their will.
Setting up a charitable trust
There is the option to set up a charitable Trust during your lifetime. This is a legal arrangement that can allow you to allocate capital and income to support charitable causes. The Trust can be set up to gift money during your lifetime and as part of your inheritance when you pass away. You will need to decide on the purpose of the charitable Trust and select Trustees to manage the Trust and make decisions. A charitable Trust is irrevocable meaning that if you pass assets into the Trust, they cannot be returned back to you. The intention of a charitable Trust is to make donations or grants to chosen charities which is ultimately decided by the Trustees.
A charitable Trust is created by way of a Trust Deed. This will confirm the Trustees, the charitable objectives and the rules of the Trust. You will need to ensure compliance with tax and charity laws that are in place at the time.
How to update an existing will to include a charitable gift
You can update your Will by way of a Codicil. A Codicil is supplement document to your Will that carries out minor amendments and changes you wish to make. If there are multiple changes you wish to make or you already have a Will and Codicil in place, it is highly recommended to prepare a new Will to save on confusion and ensure your Will is doing what you intend for it to do.
Will leaving money to charity reduce Inheritance Tax?
Gifts made to a UK registered charity are exempt for Inheritance Tax regardless of the amount that is left and can also reduce your inheritance tax rate.
If your estate was worth £5 million, and you left the entirety of it to charity, there would be £0 to pay in Inheritance Tax.
If you wish to leave 10% or more of your estate to charity, this will reduce the inheritance tax rate from 40% to 36% and the amount that you have left to charity, will be tax exempt. The remainder of the assets subject to inheritance tax, will be taxed at a rate of 36%. This reduction can benefit your beneficiaries by leaving them with more inheritance as well as benefiting charities.
It is essential to seek independent legal advice with regards to inheritance tax to take all things into consideration and ensure you are well equipped to minimise potential inheritance tax liabilities.
Can family members contest a gift in my will?
If an individual leaves a substantial amount to charity and either leaves a reduced amount or does not leave their loved ones anything, this may provoke a dispute. Family members or other dependents would still have the ability to contest a Will even if the Will leaves assets to a charity. However, the claim would be less likely to be successful in comparison to assets being left to individuals.
Whilst it is possible for a family member or dependent to dispute a Will or make a claim against an estate, certain legal criteria must be met for the challenge to proceed.
There are many reasons as to why someone would contest a Will. This could be because someone feels that the individual was subject to undue influence, they feel that the person lacked mental capacity at the point of signing their Will or they believe that it was morally wrong they were left either a reduced amount or nothing at all. An individual can make a claim under The Inheritance (Provision for Family and Dependants) Act 1975.
There are many risks to preparing a Will such as drafting the Will incorrectly which may lead to your wishes not being carried out and also, the document being executed wrongly which would lead to the possibility of it being deemed invalid. There are strict rules and requirements in place with regard to signing and executing a Will.
There are also legal provisions that should be included in your Will to ensure the smooth administration of your estate and enable your Executors to carry out their roll.
How Goughs Solicitors can help
Here at Goughs Solicitors, we will ensure that your Will is legally prepared, you receive accurate legal advice on your particular situation, and we will carry out your wishes correctly. We can help in structuring your Will in the best possible way to enable charitable gifting whilst minimising possible inheritance tax liabilities or any future claims on your estate.
If you would like expert guidance on making a Will, please do not hesitate to get in touch.
