An opportunity to increase legacy income? Promoting the benefit to donors of increased legacy giving

A recent forecast from Legacy Foresight (which can be viewed here) has suggested that legacy income could fall by as much as 27% in 2020 as a result of the coronavirus pandemic. This will have an impact on all charities and it will be more important than ever for charities to do all that they can to maximise their legacy income.

One way of encouraging increased legacy giving is to promote the benefit to donors of leaving 10% of their estate to charity to qualify for the reduced Inheritance Tax (IHT) rate of 36%.

The Basic Principle

The rules are set out in Schedule 1A Inheritance Tax Act 1984 and, although complex, the basic principle is that an estate will qualify for the reduced IHT rate of 36% where 10% of the net estate is left to charity. The net estate is the total value of the deceased’s estate, less any available exemptions (such as the Nil Rate Band) and reliefs. When calculating the net estate, it should be noted that any Residence Nil Rate Band and Transferable Residence Nil Rate band is not deductible.

Example

Jane dies leaving an estate worth £725,000 after the payment of liabilities. She leaves a legacy of £50,000 to charity and the balance of her estate to her children.

From the value of her estate, her Nil Rate Band of £325,000 is deducted leaving a ‘net estate’ of £400,000. 10% of the net estate is £40,000 and therefore this is the minimum amount that she would need to leave to charity to qualify for the reduced IHT rate. As she is leaving a legacy of £50,000 to charity her estate will qualify for the reduced rate.

How can this help my charity?

The important thing to note about the application of the inheritance tax reduced rate is that, due to the way it is calculated, the non-charitable beneficiaries of the estate will receive the same amount if the gift to charity were 4% or increased to 10%. However, if a percentage in between 4% and 10% were gifted to charity, the non-charitable beneficiaries would in fact receive less than if 10% were given.

Using the facts in the example above this can be demonstrated in the table below:

Amount of net estate passing to charity

2%

4%

8%

10%

Total estate

£725,000

£725,000

£725,000

£725,000

Nil Rate Band

£325,000

£325,000

£325,000

£325,000

Net estate

£400,000

£400,000

£400,000

£400,000

Amount passing to charity

£8,000

£16,000

£32,000

£40,000

Amount passing to non-charitable beneficiaries

£560,200

£555,400

£545,800

£555,400

IHT

£156,800

£153,600

£147,200

£129,600

Potential donors should therefore be made aware of the benefits not only to your charity but also to their other beneficiaries of leaving a larger charitable gift in their wills.

Can anything be done once a donor has died?

As well as encouraging donors to make wills leaving 10% of their estate to charity, you should also review estates which are currently being administered where the deceased died less than 2 years ago. Where these estates are subject to inheritance tax and 4% or more (but less than 10%) of the estate has been left to charity, you should consider approaching the non-charitable beneficiaries to see if they would consider entering into a deed of variation to increase the charitable legacy to 10%. By agreeing to this there would be no detriment to the non-charitable beneficiaries, as the increased amount passing to charity would be funded by the reduced amount of IHT payable. The only loser in this scenario would be HMRC.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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