T Balendran Director
01st April, 2017
The ways in which individuals are giving to charities is changing. In this article, we look at how investment advisors are dealing with the evolving philanthropic needs of their clients.
Philanthropy has emerged as an important objective for many individuals and their advisers. The UK has always had a strong tradition of charitable giving; however for many years this took the form of one-off, spontaneous donations to various appeals, collections and fundraising events. In recent years though, this trend has begun to change with a move towards more structured giving and a renewed interest in establishment of charitable foundations.
Demographics are also a factor in this: there is a growing generation of individuals in the UK in their 60s and 70s with significant self-created wealth. These individuals are beginning to think about if, when and how they will pass on their wealth and for some these succession plans will involve the creation of a charitable legacy.
Philanthropy can mean different things to different people, though is broadly defined as: “the desire to promote the welfare of others, expressed especially by the generous donation of money, goods or services, to good causes.” – Oxford English Dictionary.
Charitable gifts are commonly made through one-off gifts or regular gifts, though increasingly, individuals are bequeathing gifts on death.
Leaving a gift to a charity on death can benefit both parties. The benefit to the charity is clear but it is worth considering the advantages to the donor – specifically surrounding inheritance tax.
On death, an individual is subject to inheritance tax at a rate of 40% of their net estate value – i.e their estate value in excess of the Inheritance tax nil-rate band, currently £325,000.
However, charitable gifts made on death are considered outside of your IHT assessable estate, thereby enabling you to reduce your potential total IHT.
If on death you leave at least 10% of your estate, after any exemptions, to charity, this reduces the rate of any IHT due from 40% to 36%.
Mr Murphy, an unmarried individual is considering availing of the reduced rate of 36% IHT by leaving 10% of his net estate to charity. He would like to know how this would affect his estate and beneficiaries in monetary terms before he decides how to proceed. Below is a comparison of the IHT liabilities should he elect to leave 10% of his net estate to charity on death, or not, based on an estate value of £1,000,000.
Based on an estate value of £1,000,000, Mr Murphy would expect to leave a net Inheritance of £730,000 to his beneficiaries.
Based on an estate value of £1,000,000, assuming Mr Murphy leaves 10% of his net estate value (or £67,500) to charity, he would expect to leave a net Inheritance of £713,800 to his beneficiaries.
In summary, based on the example above, in return for a reduction in inheritance of £16,200, Mr Murphy would be able to make a charitable gift of £67,500 – the difference of £51,300 being made up by a reduction in IHT liability.
Note that for the purposes of this example, we have assumed Mr Murphy is unmarried and has not made any gifts in the previous seven years, and that the main residence nil-rate band does not apply.
If such a strategy does appeal, you should ensure that your intention to gift is clearly reflected in your will, including details of the quantum and the specific charity (including registered charity number and address).
If IHT mitigation is a primary objective of yours, there are a number of alternative options available to you, including options which do not involve loss of assets. Do please let us know if you would like to discuss your specific position further.
Warning: The information contained herein is based on Davy's understanding of current tax legislation in the UK and the current HMRC interpretation thereof and is subject to change without notice. It is intended as a guide only and not as a substitute for professional advice. You should consult your tax adviser for the rules that apply in your individual circumstances.
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