Inheritance Tax Relief by Leaving a Gift to Charity

Inheritance Tax Relief

As people in the UK are being encouraged to get their will drawn up and their estate planning in order, there are several ways to reduce the amount of inheritance tax payable on a deceased person’s estate. One of these is the inheritance tax relief received by leaving a gift to charity.

As the value of property increases so does the value of people’s estates, pushing them above the £325,000 inheritance tax threshold. Indeed, the OBR, Office for Budget Responsibility, are suggesting that by 2026 there could be as many as 50,000 estates falling victim to inheritance tax. But by leaving a gift to charity in your will, your beneficiaries could receive inheritance tax relief.

What is inheritance tax relief?

First, let’s start with explaining inheritance tax. It is the amount of tax your beneficiaries will pay on your estate upon your death. Currently, the inheritance tax rate is 40% and the threshold is £325,000. So, if your estate is valued at £600,000 and you deduct the threshold amount of £325,000, your beneficiaries who have inherited your estate will pay 40% tax on the remainder – £275,000 – to HMRC. If the estate is valued at less than £325,000, there is no inheritance tax payable.

However, there are some tax allowances that can reduce the amount of inheritance tax paid by your estate beneficiaries. One of these allowances is if a percentage or the entire estate is ‘gifted’ to a charity, or the estate is left to a living spouse or civil partner. Inheritance tax relief also applies to gifts that have been made to a beneficiary seven years prior to the death of the testator.

Why leave a gift to charity?

Many people have favourite charities which they have supported in their lifetime, and they often choose to further support the charity upon their death by leaving a gift to them in their will. As well as the charity benefiting from the gift, it can also benefit the deceased’s family by reducing the amount of inheritance tax (IHT) payable.

When gifts are left to qualifying charities – a charity that is established for a charitable purpose and satisfies jurisdiction, registration and management conditions – the level of IHT applied to the deceased’s estate above the threshold drops to 36%, as long as a minimum of 10% of the net estate’s value (the baseline amount) is gifted.

So, taking our example above, if the deceased gifts £50,000 to charity, which is above the 10% baseline amount, and the cost of funeral expenses and paying any debts are deducted, i.e. £20,000, the amount of IHT payable is £275,000 – £70,000 = £215,000 x 36% = £77,400.

So, the total amount payable to HMRC is £77,400, leaving £137,600 to the deceased’s beneficiaries as their inheritance.

What to consider when leaving a gift to charity in your will?

If you are thinking about leaving a donation to a charity in your will, here are some points to consider:

Cash or asset – leaving a gift to charity doesn’t have to be cash; you can also leave an asset, such as property, jewellery, antiques or even artwork. It is then up to the charity what they do with that asset. In addition, you can also leave what is known as a reversionary gift; this is a gift, like a physical asset, that is initially left to the deceased’s specified beneficiary, usually a spouse, and upon their death it passes to the charity.
Ensure it is a qualifying charity – not every charity can claim to be a qualifying charity so make sure the charity you choose is registered with the Charity Commission in England and Wales. Scotland and Northern Ireland have their own charity register where you can check to see if the charity you’ve chosen is registered. If your charity is not registered but adheres to the Charities Act definition of a charity, your estate and beneficiaries will still benefit from inheritance tax relief.
Add any instructions – when making a gift to charity, you may want the funds you give, or the asset, to be used in a specific way, such as aiding research. In this situation, you can add any instructions to your gift in your will but make sure you discuss with the charity of your choice first, to ensure it is feasible for the charity to honour your wishes.
The gift value may change – if you are gifting a lump sum to a charity or a percentage of your estate, be aware that this may change and the charity may receive less than you intended. By index-linking the gift, you can protect your charitable gift from increases in inflation which would impact a lump sum. However, if gifting a percentage of your estate and the value of your estate decreases in size, you may wish to adjust the percentage of the gift in your will.
Residual gifts – similar to the above, if you leave the residual amount of your estate, i.e. what’s left after expenses, debts and any other legacies have been deducted, you may find that the charity receives a greater proportion of your estate because their gift is tax-free, whilst another beneficiary will have tax deducted from their share.
Double-check the charity’s details – when drawing up your will in advance of your death and making a gift to a charity, always keep up to date with the charity’s details, such as any name changes to the charity, or a different address or the charity closes. Therefore, add the charity’s registration number (if there is one) and if not, update your will accordingly.
The cause of a dispute – always be upfront with your family and other beneficiaries about your charitable gift in your will. In accordance with the Inheritance Act (Provision for Family and Dependants) 1975, beneficiaries have the right to dispute a charitable gift. So to avoid any disputes after your death, make your intentions clear and reassure family and beneficiaries they will be provided for in the future.

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable. If you are an Executor of a will and need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.

What Are the Risks When You Set Up Lasting Power of Attorney?

Lasting Power of Attorney

Should you have a long-term debilitating illness or be suffering from a loss of mental capacity, it is reassuring to know that someone you trust is managing not only financial matters, but is also able to make decisions regarding your ongoing health, welfare and care.

To make this possible, before (and if) you get to this stage in your life you will need to draw up a Lasting Power of Attorney (LPA). By appointing someone, known as the ‘attorney’, to look after you and make decisions on your behalf when you are not capable of doing so yourself can bring great peace of mind. However, there can be risks associated with a Lasting Power of Attorney.

What is a Lasting Power of Attorney (LPA)?

An LPA is a legally-binding document that allows an appointed, or ‘chosen’, person, called an attorney, to handle your financial, health, well-being and care matters should you be in a position where you are unable to make decisions for yourself.

There is a difference between a Power of Attorney (POA) and an LPA – a POA is only designed for an attorney to handle your financial and property affairs. An LPA is designed for an attorney to manage your financial, property, health, welfare and care matters.

Whilst you can draw up your own LPA using a DIY option, it is better to have a POA or LPA drawn by a legal professional who is experienced in this matter to ensure that nothing has been left out, that it is correct and that it will be registered with the Office of the Public Guardian (OPG) in England and Wales via a form. There are different rules for drawing up an LPA in Northern Ireland and Scotland. This means that should the POA or LPA become active, there is no possibility of it being rejected by another party, such as banks, doctors or utility providers.

Choosing the right person to act as attorney is crucial to an effective, properly managed LPA; they must be over 18 years of age and someone that you trust to look after your affairs. They don’t necessarily need to be a member of your family, they can be a close personal friend and sometimes that can be a preferred option to release any emotional pressure a family member may feel. Remember that the person you choose will have access to your bank accounts and all matters relating to you. They will be making decisions and signing off on any financial matters, including selling or buying property, as well as your care and where you will live.

You may decide to choose more than one attorney, each having a different responsibility towards you, such as one to look after property matters, another to make financial decisions and another to manage your care and welfare. Ultimately it is up to you but bear in mind that their individual decisions will have an impact on another attorney’s decision so make sure they all know each other and are happy to collaborate together.

If you do not have an LPA and lose the mental capacity to make decisions yourself, then an application to the Court of Protection must be made and they will make a decision about your financial, property, health and welfare matters, or appoint a deputy to act for you.

Risks associated with an LPA

As with any situation where you are handing over control of your affairs, there is an element of risk involved. Some of these risks are:

● They will have access to your personal, private and confidential information.
● They will be making decisions about your lifestyle, such as where you will live if not in your own home.
● They will make decisions on what treatment you should and should not receive.
● They have access to your personal correspondence and other papers, such as your medical records.
● They will be managing your bank account(s) and other financial matters. However, if it is found by the court that they have acted dishonestly, fraudulently or mis-managed your finances they will have to pay you back.

It is vitally important that you trust the person(s) you appoint as an attorney(s). It may be wise to include an advance decision or statement in your LPA that specifies your wishes/preferences in certain situations. Some questions to consider when choosing your attorney are:

● Do you wish to have another person, i.e. a member of your family, to have a say in what treatment you receive, your future healthcare and personal care. Ultimately the decision is down to your attorney but if you’ve made this wish, they should consult with the other person.
● Will your attorney listen to medical professionals about your treatment/healthcare and always have your best interests at heart?
● Will they be making decisions for you in the short-term or long-term?
● Do you fully trust them to make the right decisions for you as you would have made yourself?

It is worth noting that if you have appointed more than one attorney to look after specific areas of your life, they cannot make a decision on an aspect they have not been appointed for; i.e. if they are looking after your financial and property matters, they cannot make a decision about your healthcare or welfare.

There are some areas where an attorney is not allowed to make a decision on your behalf, such as:

● To go against any decision or preference you’ve made, i.e. refusal of certain treatments, in your advance decision/statement in your LPA.
● To agree to a deprivation of liberty (a situation where your liberty is taken away from you, i.e. you are not free to leave and are placed under constant supervision) to be imposed on you without a court order.
● If you are under a guardianship, they are not allowed to make a decision that conflicts with your guardian’s decision, such as where you live.
● They are not allowed to make decisions that you wouldn’t normally make yourself, such as going against the law.

At Probates Online, we are able to offer a professional online probate service, including drawing up a Lasting Power of Attorney or Power of Attorney, which is efficient and affordable. If you want advice on LPAs and POAs or need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.

Types of Wills – Which Type of Will Do You Need?

Types of Will

The Covid-19 pandemic has highlighted many aspects of our lives, none more so than the need for making a will. However, the latest research from Canada Life shows that 59% of UK adults have not written a will – that’s 31 million people whose estate could end up in the hands of someone not of their choosing.

But when it comes to writing your will, it can be hard to know which type of will you need as there are four different types of will in the UK – single, joint (mirror), living and trust wills. So let’s take a closer look at the different types of will, what they should include and which one is right for you.

Do I need a will?

First, let’s answer a common question. In a nutshell, yes, you do need a will if you want to decide who gets what from your estate on your death.  But that’s not the only reason; a will can also be used to ensure that should you not be able to take care of yourself and make your own decisions at some point in life, your affairs and wishes are taken care of during your lifetime.

A last will and testament is one of the most important documents in your estate planning and it is up to you who benefits from your estate, and who manages the distribution of your estate when you die.

Types of Will

Different types of will have different purposes; wills are drawn up to not only cover how your assets are distributed upon your death but can also include your funeral plans, the beneficiaries for any special items or sentimental or personal value – such as family heirlooms – and some wills also cater for your healthcare wishes if you are incapacitated and are unable to make your own decisions. Which will is suitable for your needs depends on your circumstances.

  • Single (simple) will – probably the most well-known, common will that is used by an individual that details their wishes upon their death. It can be used by anyone that is single, divorced or in a relationship where their wishes are different to that of their partner/spouse. This type of will is also used by people that have children from a previous relationship and wish to divide their estate between children/spouses from both relationships. However, in these circumstances, you may find that a trust will is more appropriate.
  • Joint (mirror) wills – this type of will is for couples, whether it is your spouse, your civil partner or the person with whom you have a long-term relationship, that have the same wishes upon their death, hence the term ‘mirror’. Whilst two wills are drawn up by your solicitor (or yourself), the wills are almost identical. There are several things to be aware of if you decide to have a joint will:
    • Upon the death of one spouse, the entire deceased’s estate passes to the surviving spouse.
    • Upon the death of the surviving spouse, the estate is distributed in accordance with the joint wishes specified in the will. This could create a problem should the surviving spouse remarry or commit to another long-term relationship as any step-children will be omitted, or there are children from a previous marriage.
    • There has to be an element of trust between spouses/civil partners as there is no guarantee an estate will be passed on to the people you wish.
    • Because the two documents of the will are drawn up at the same time, either party is entitled to change their will at any time and they legally do not have to advise the other party of the change. Therefore, you may find that a trust will is a better option.
  • Trust wills – there are several different types of trust wills, depending on your needs, and they provide greater flexibility over who benefits from your estate, which can be broken down into property and assets. A trust will can also detail how the estate is managed upon your death if the beneficiaries are below a certain age, and your wishes in terms of your healthcare and welfare[1] .
    • Discretionary trust wills – this type of will puts a proportion of, or the entire estate into a trust that is managed by your appointed trustees upon your death. A discretionary trust will name the beneficiaries of the trust, which may be receiving an income from the trust until the beneficiary reaches a certain age or to look after a beneficiary’s health and welfare, such as a child or adult with a disability. The trustees must manage and administer the trust according to your wishes, although they do have some discretion. In addition, it can protect beneficiaries from paying too much tax and from creditors should a beneficiary be in severe debt.
    • Property trust wills – this type of trust will work in a similar way to a discretionary trust will but holds your property (or properties) in a trust from which a beneficiary can receive an income. For example, a surviving spouse would receive an income from the property trust and also be able to continue to live in the property but on their death, the assets pass to other beneficiaries as stated in the trust will.
    • Flexible Life Interest trust will – again, this is similar to the other types of trust will but provides greater flexibility in providing an income from the assets protected in the trust. Therefore, should you have a spouse that needs ongoing care or there are care home fees to pay, the trustees have greater control on how and when the trust funds are released. Whilst these types of trust do protect from Inheritance Tax, both Capital Gains Tax and Income tax will still apply.
  • Living will – lastly is the Living will which is also known as Advance Decisions because this type of will details any care and medical treatment you may require in the future, should you be in a position where you can’t make those decisions for yourself. This can include life-support, being put on a ventilator or CPR as well as treatment for long-term illnesses, such as Parkinson’s or cancer.

All wills must be signed by the testator (the person making the will) in front of at least two witnesses, who will also sign the document as confirmation they have seen the testator signing the will. 

As well as the above types of will, which are the most common, there are also two other types – holographic wills are handwritten wills and oral wills, which are also called ‘nuncupative’ wills.

At Probates Online, we are able to offer a professional probate service online that is efficient and affordable.  If you are an Executor of a will and need to apply for Grant of Probate, Letters of Administration or would like to take advantage of our entire Estate Administration service, visit our website for more information or contact us today.