I’d like to give money to my family or charity before I die. What’s the best way to do this?

Posted on By Joanna Pegum
family group

Here are some of the most common questions from our clients about how best to donate their money and assets:

Modest gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April). This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year once.

You can give as many gifts of up to £250 per person as you want during the tax year, as long as you have not used another exemption on the same person.

More people are using these allowances, often to help people out of tight situations through reduced incomes. Keeping a record of such gifts is vital for tax purposes.

It can also benefit your family to make a larger gift now if your asset may increase in value, putting any future gain in the hands of the recipient.

Deathbed Gifts

We have also seen use of so called ‘deathbed’ giving, when people are near to death and know they will not need funds.

If you die and your estate is worth more than the basic Inheritance Tax threshold, your estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due. The person will need to leave some property to their descendants.

The maximum available RNRB in the tax year 2024 to 2025 is £175,000. The RNRB will gradually reduce for an estate worth more than £2 million, even if a home is left to your direct descendants. The RNRB reduces by £1 for every £2 that the estate is worth more than the £2 million threshold. For those who are in a marriage or civil partnership, using the RNRB on first death may be prudent planning.

‘Deathbed giving’ is sometimes advisable in seeking to keep the value of your estate below the £2 million threshold. You need to take into account the effect of the gift on your ordinary Nil Rate Band. We recommend you seek advice on this.

Surplus Income Gifting

Unlike other forms of lifetime gifting, this has no limit. You must be able to prove that the income, expenditure and amount you are regularly giving away is a conscious decision. It must be surplus income, not eat into capital.

Gifting to good causes

People may wish to give charity, the arts, museums, universities, and community amateur sports clubs. Such gifts are exempt from inheritance tax and do not adversely affect your tax position on death as they do not eat into your estate’s ‘nil rate band’ or annual exemption. The ‘nil-rate band’, which is currently £325,000, means that it is taxed at 0% (‘nil’) unless there are lifetime gifts or trusts.

An extra benefit of gifts to charity is that you can claim Gift Aid. Charitable causes can claim an extra 25p for every £1 you give. It will not cost you any extra.

Ask your employer or pension provider if they run a Payroll Giving scheme, so you can donate straight from your wages or pension before tax is deducted.

Assets fat with gain

Valuable items which will make a large profit when sold are an excellent choice for gifting to charitable causes. They are treated as neither a gain nor a loss. For example, historical jewellery collections could be donated.

More controlled charitable gifting

Some people choose to donate on a more personal, controlled, level by creating their own trusts and foundations. This could be a charitable trust, charitable company or Charitable Incorporated Organisation. Setting up lifetime foundations and trusts enables you to set the focus of the charity and work alongside other trustees who will then be able to continue the work after your death.

 Trusts

Although immediate cash gifts can be helpful, for some people, retaining a degree of control is equally important. A trust is the perfect vehicle. It is a mechanism which splits the responsibility for the management of administration of assets from the right to use or benefit from the assets. Trustees control and beneficiaries benefit.

There are many types of trust, but there is almost certainly one which will suit your wishes.

Mandy Casavant is a Partner with RWK Goodman

Giving to charity: what is Gift Aid and how does it work?

Posted on By Joanna Pegum
young woman writing

Many people give to charity during their lifetime, as well as including bequests in their wills. If you are a UK taxpayer, you can donate through the Gift Aid scheme, and may be eligible for tax relief.

For charities, Gift Aid increases the charity’s donation by 25%, allowing the charity to reclaim the basic rate of tax on your gift at no extra cost to you. Provided you make a Gift Aid Declaration, this happens automatically.

For example, if you give £80, which is known as the net donation, the charity receives £100, ie the gross donation. This is the same as you making a payment of £100 from your pre-tax earnings, assuming you pay tax at the basic rate of 20%. If you pay income tax at the basic rate, there is no further tax relief available to you.

How Gift Aid works for higher and additional rate tax payers

If you are on a higher or additional rate you can claim further tax relief. This works by extending your basic and higher rate bands by the gross donation. Your relief will be equal to the difference between the basic rate, and either the higher rate of 40% or the additional rate of 45%, depending on the rate of tax you pay.

For a higher rate tax payer (40%), a further 20% of tax can be claimed on the gross donation, ie a further £20. For an additional rate payer (45%), an extra 25% can be claimed, being a further £25.

Here’s an example:

You are a higher rate taxpayer paying with earnings of £75,000 and you give an £80 donation to a relevant charity, and make a gift aid declaration. The example uses the tax rates for England and Wales; different tax bands apply in Scotland.

The charity automatically claims 25% of £80 = £20 from HMRC. The charity has received £100 (the gross donation).

2023/24 bands
Higher rate band £37,700
Additional rate band £125,140

You declare the £100 gross payment on your tax return and extend your higher rate band by the gross payment (the additional rate band would also be extended where the individual earns over the additional rate threshold of £125,140).

2023/24 bands after extension
Higher rate band £37,800
Additional rate band £150,100
Tax on your £75,000 salary, ignoring any donation
Personal allowance £12,570 £-
Basic rate £37,700 x 20% £7,540
Higher rate (£75,000-£37,700-£12,570) x 40% £9,892
Total tax £17,432
Tax on your £75,000 salary, taking the donation into account
Personal allowance £12,570 £-
Basic rate £37,800 x 20% £7,560
Higher rate (£75,000-£37,800-£12,570) x 40% £9,852
Total tax £17,412

The tax saving where the bands have been extended is £20, since an individual earning £75,000 is a higher rate tax payer. There would be a further £5 in the case of an additional rate taxpayer.

If your total tax liability in the tax year is less than the amount of tax the charity reclaims on your gift, you may have additional income tax to pay.

Inheritance tax

Legacies left to charity from your will are entirely exempt from inheritance tax. If you leave legacies equal to 10% of your total estate to charity (less the £325,000 nil-rate band, and any residence and transferable nil-rate band) then your executors pay a reduced rate of inheritance tax at 36% on your death estate, rather than 40%. Both the nil rate band and residence nil rate band will be frozen until 5 April 2028.

If you are anxious to obtain the discounted rate, you need to give careful consideration as to how this is achieved through the drafting of your will. A TEP can provide guidance on this.

Check the charity is genuine

Before you make your donation, make sure you are giving to a bona fide cause by checking with the appropriate governing body. For England and Wales this is the Charity Commission, and in Scotland, the Office of the Scottish Charity Regulator (OSCR). A legitimate charity will be registered with one of these bodies and you can search their websites.

Registered charities with over £25,000 of income are required to submit their financial statements, annual reports and annual returns to the Charity Commission or OSCR. These bodies provide charity trustees with guidance on managing their charities for the public benefit, ensuring good practice and appropriate reporting requirements are adhered to.

Toby Crooks TEP is a Partner at Rawlinson & Hunter LLP in London, UK

Can you change a will after someone has died?

Posted on By admin
man looking concerned

Following the death of a friend or loved one, it may be necessary or beneficial to change the will. This may be in order to increase the size of a gift to someone, redirect it or even to adjust the will to take advantage of recent tax changes.

In the UK, changes can be made by a simple document called a Deed of Variation.

Common reasons for making a Deed of Variation

Some common reasons are listed below:

  • Someone in the family has been overlooked
  • A beneficiary has not been provided for adequately
  • Someone may have a valid claim against the estate
  • To reduce inheritance tax
  • To move assets into a trust
  • To resolve any discrepancies within the will
  • To give gifts to charity

How do I make a Deed of Variation?

Making a Deed of Variation is fairly straightforward, as long you do it within two years of death and all of the relevant beneficiaries contained within the will agree to the changes.

In theory, to vary a will you can just write a letter. It does, however, need to include a number of elements to ensure it meets the requirements of the Inheritance Tax Act and the Taxation of Chargeable Gains Act. A checklist is available here.

If the variation means there’s more inheritance tax to pay, you must send a copy to the UK’s tax authority, HM Revenue and Customs (HMRC) within six months of making the deed.

Minors who are beneficiaries cannot consent to a deed of variation so the beneficiaries may need to go to court to obtain consent on their behalf. Once the deed has been consented to and executed by the beneficiaries, they will not be able to claim their inheritance back.

If you are unsure about any aspect of varying a will, speak to a qualified advisor, who will ensure all requirements are met and prevent any disputes from arising.

How can I prepare for inheritance tax?

Posted on By admin
family

Inheritance tax is a 40% tax on your estate (your property, money and possessions), which is charged when you die. In most cases you only have to pay it if your estate is worth more than £325,000.

If your estate is likely to exceed this, there are some steps you can take to prepare for inheritance tax, and to ensure more of what you own goes to your loved ones.

Write a will

It’s well worth writing a will for a number of reasons. A professional advisor can make sure that your will takes into consideration any tax benefits that are available to you. If any benefits are overlooked, your executors can amend the will after your death, with a deed of variation.

Work out the value of your estate

You’ll need to work out how much your estate is worth to find out if you are going to be liable for inheritance tax. No tax is payable on the first £325,000, and this is known as the nil-rate band. But if you’re married, or in a civil partnership, you can pass your whole estate to your spouse or civil partner when you die, tax free. Your ‘nil-rate band’ then transfers to your spouse or civil partner, so when he or she dies, they will be able to pass on up to £650,000 tax free.

Inheritance tax benefits

Everybody gets an additional £175,000 free of inheritance tax to use against the value of their home, if it is left to children or grandchildren (2021-22 figures). As this allowance can be transferred to the second spouse/civil partner, a married couple could leave their family a combined estate of up to £1 million tax-free.

Both the nil-rate band and residence nil-rate band will be frozen until 5 April 2026.

Other tax benefits

There are other benefits you can use, mainly by reducing the value of your estate. There is an annual exemption of £3,000 that you can give away inheritance-tax free and you can give £250 to as many different people as you like. Donations to charities are tax free, as are wedding/civil partnership gifts from parents (up to £5,000) from grandparents (up to £2,500) and from anyone else (up to £1,000). You can make cash gifts larger than this, but you will need to survive seven years for them to be free from inheritance tax. the UK’s tax authority, HM Revenue and Customs (HMRC), provides a sliding scale so you can work out how much tax is payable if you survive less than seven years.

Use a trust

If you can estimate the amount of money that you will need to pay for inheritance tax, you can arrange to hold a lump sum on trust. You can contribute the nil-rate band of up to £325,000 tax-free into a trust every seven years, and it will not be included in your taxable estate.

Take out a life insurance policy

To minimise any impact on your loved ones, you can take out a life insurance policy to cover your inheritance tax bill, which will pay out on your death. As above, the policy would be held on trust so would not be taxable.

Use excess income

If you can spare some of your income without this affecting your quality of life, this is known as excess income. You are entitled to make gifts of money from your excess income to other people free of inheritance tax. However you must keep good records of your regular expenditure as well as the gifts made so that your executors can report them to HMRC and obtain the inheritance-tax exemption.

Give to charity

All gifts to charity are exempt from inheritance tax, but if you arrange to give 10% of your estate to charity (less the £325,000 nil-rate band) then you can pay 36% inheritance tax on your death instead of the usual 40%.

Get help

A qualified advisor will be able to assess your individual circumstances and advise on what you can do to prepare for inheritance tax.

Can I leave everything to charity in my will?

Posted on By admin
donating to charity - giving money - piggybank

Many people choose to leave money or other assets to charities when they die. Where a charity is particularly important to you, or where you feel your relatives are sufficiently well off, you may wish to leave most or all of your estate to charity.

In many countries, including Scotland, it’s not possible to do this, as set quotas must be reserved for certain relatives.

In England & Wales and Northern Ireland it is possible to leave your whole estate to a charity. However, you will need to make sure you provide for any close family and dependants that rely on you. If you don’t, and they bring a claim, a court can award them some of your estate if it decides it puts them in financial difficulty.

Make sure your family know your intentions in advance to avoid delays, legal costs or distress.

Avoiding disputes with your family

If there is any possibility that your will may be challenged, you should consult a professional advisor, who can ensure you have done everything possible to prevent this eventuality.

The following four steps are also all advisable:

  1. Tell your family why you are leaving everything to charity, and not to them.
  2. Write a letter to accompany your will explaining your reasons, and also why the charity is important to you.
  3. Get a doctor’s certificate confirming that you were of sound mind when you made the will. This way it can’t be challenged on grounds of mental incapacity.
  4. Make your intentions clear to your will advisor in writing.

Plan for the long term: choose your charity with care

Your chosen charity might have been wound up, or merged with another one, by the time you die. To play it safe, you could name a second and perhaps a third as a back up. Alternatively your will advisor could add a clause into your will to direct the legacy to a similar organisation.

If you are leaving a large amount of money to charity, think about setting up a charitable trust in your will. An advantage of this is that you can simply indicate how you wish the funds to be used (for example, ‘for medical research’), but leave it to the trustees to decide over time which projects should be funded.

Get advice

As mentioned above, if you decide to leave everything to charity you should speak to a qualified advisor, who will help ensure all relevant issues have been taken into consideration.