Giving money to a charity through a will is commonplace. Not only will it help support a favoured good cause, it can also reduce your exposure to inheritance tax. And if you give 10% of your estate to charity, your inheritance tax rate will fall from 40% to 36%.
But the rules are complex and if a will is badly drafted it could leave beneficiaries with a larger than expected inheritance tax bill, warns Olivia Meekin.
In broad terms, everyone in the UK can pass on cash or assets to the value of £325,000 free from inheritance tax (IHT). And whilst various reliefs are available, everything over that threshold, called the nil-rate band, will be taxed at 40%.
Giving money to charity through your will is one way to reduce your IHT exposure whilst helping good causes, with IHT charged on the value of the estate after charitable donations. Charity advisers Smee and Ford estimate that in 2022 36,000 estates left gifts to charities totalling £23bn.
Perhaps a little less widely appreciated is that when 10% of an estate is given to charity, the rate of IHT falls from 40% to 36% on the remaining estate. It sounds attractive, but the rules are complex, and a badly drafted will can leave the charity and other beneficiaries with a smaller legacy than expected. It may result in the will being challenged.
Problems can arise when a will fails to state if the gift to the charity is to be given before or after IHT has been deducted. It may sound like a small point, but it has significant implications and has been the subject of two important court cases known as the Benham and Ratcliffe rule.
Where the charitable gift is made after the deduction of IHT, a charity is likely to receive a smaller gift, with the beneficiaries likely to receive a larger legacy, and with more IHT paid. This is called the ‘net division approach’ and was settled in the Benham case.
Whereas if the charitable gift is made before the deduction of IHT, a charity is likely to receive a larger gift, with the beneficiaries likely to receive a smaller legacy, and with less IHT paid. This is called the ‘gross division approach’ and was settled in the Ratcliffe case.
It is widely understood that the ‘gross division approach’ sits more comfortably with the spirit of the rules where a gift of 10% or more of an estate lowers the IHT rate on the remaining estate.
It is perhaps understandable that when a will is unclear, either the charity or the beneficiaries of an estate will be disappointed and may wish to challenge the will.
The impact of a badly drafted will has been starkly illustrated in a report in The Daily Telegraph with a 72-year-old woman acting as an executor of a late aunt’s estate. Having distributed that estate equally among family members and with a charity named in the will, she later faced a £50,000 bill from that charity which believed the legacy was short.
Advice on legacies
It is a complex area of law and unintentional mistakes can easily be made. When dealing with a sizeable estate and where legacies are to be given to charity, even where they do not hit that 10% threshold, expert advice should be taken from an experienced solicitor in writing wills. They will understand and explain the Benham and Ratcliffe rules and make sure the right approach is taken, minimising the risk of a disputed will.
The last thing anyone will want is a bitter dispute between much-loved family members and a favoured charity to be your lasting legacy.
Contact our Private Client Solicitors
The above is accurate as at 24 February 2023. The information above may be subject to change during these ever-changing times. The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.