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Don't forget charities when you review your Will

Charitable giving is often done on an ad hoc basis and can be overlooked as part of estate planning. But it can help to reduce tax liabilities both during your lifetime and afterwards and could make a real difference to a small local charity, providing a lasting legacy in your name.

It is essential to keep on top of your financial affairs and to keep them up to date and as funding sources become harder to find, being able to help local charities may ensure their good work continues for years to come.

You should review your Will every five years, or on events such as:

  • The birth or adoption of a child or grandchild.
  • The death of your spouse, beneficiary, executor or child’s guardian.
  • Marriage or divorce of yourself or your beneficiaries.
  • A substantial increase or decrease in the value of your estate.
  • The formation, purchase or sale of a business.
  • The purchase of property.
  • Retirement.
  • Changes to tax allowances.

Reviewing your Will regularly enables you to:

  • Protect your family by making provisions to meet their future financial needs.
  • Minimise tax liability.
  • Provide trusted guardians for your dependent children.
  • Establish trusts to defer the inheritance of particular beneficiaries.
  • Include gifts for charities.

Currently where a person leaves at least 10% of the value of their net estate to a registered charity, a reduced rate of inheritance tax (IHT) of 36% (as opposed to 40%) will apply to the rest of their estate. This reduced rate is applied following the deduction of any exemptions, reliefs and the availability of the nil-rate band.

For example, if the donor leaves an estate of £425,000, then the £100,000 taxable part of the estate (over the current nil rate band of £325,00 and £650,000 for a couple) would be taxed at 40%. If they make a charitable donation of £10,000, the remaining £90,000 would be taxed at 36%.

From 6 April 2017 there will be changes phased in which have been designed to reform IHT and which will eventually provide a new main residence tax free band of £1 million. In order to qualify for the new inheritance tax allowance, a couple will need to be married or in a civil partnership and leave their entire estate to each other. They will qualify for 2 x £325,000 nil rate bands and by 2020/21, 2 x £175,00 main residence bands.

These changes to residential property do not change or affect the IHT relief which applies to property owned by a business and from which many farmers and landowners have benefited over the years, to enable the successful continuation of the business. It is worth noting that where it is a business or agricultural property, it may be appropriate to leave it to someone other than your spouse, as the benefit of other special reliefs may be lost.

When is the best time to make a donation to charity, in your Will or during your lieftime?

The answer is really down to the individual and their position at that point in time. You can make substantial gifts out of your taxable estate into trust now, during your lifetime and as a trustee retain control over the distribution and/or use of the assets. Also:

  • If you won’t be using the new main residence tax free band, then you can continue to leave 10% of your estate over the nil rate band of £325,000 to charity, to qualify for the lower tax rate of £36%.
  • You can make regular donations during your lifetime and if you are paying tax at the higher rate, claim tax relief.
  • If you run a limited company, you can make donations out of gross profits and claim corporation tax relief.

Alex Astley can be reached at [email protected]