Gifts made in favour of UK registered charities both during lifetime, and under a donor's Will on death are exempt from Inheritance Tax (IHT).
The following National Institutions are also exempt:-
- Political parties (at least two members elected as M.P.)
- Registered housing associations
- Universities
- National museums
- National Trust
- Nature Conservancy Council
- Local authorities and government departments
Although the above exemptions appear straightforward to apply, two observations are worth noting:-
- Gifts by Will (during lifetime) to foreign charities are not exempt and will be subject to IHT as part of the donor's estate.
- Careful drafting of a Will is required to avoid complications arising where estates (for inheritance tax purposes) comprise both gifts to charity (exempt) and non-exempt (brothers, sisters, children etc) gifts are made out of the residuary estate. To avoid such complications, it is recommended to leave gifts by way of percentage shares. Charities can be quite demanding in ensuring their (IHT) exempt share is maximized; it is important that the intention of the wording contained in the Will is clear cut.
The Finance Acts 2007 & 2008 reduced significantly any opportunity arising to limit individual pension plans from exposure to IHT where the pension plan (investment fund) remains intact at aged 75 years. In other words, no pension benefit has yet been taken. These plans, once the pension holder has attained 75 years, are known as Alternative Secured Pensions (ASP).
However, it is still possible to nominate the pension (investment fund) in favour of a (UK) registered charity, following the death of the pension holder and such transfer of benefits will be exempted from IHT. This could provide an alternative estate planning opportunity where an individual's Will may previously have provided for a proportion of the estate to pass to charity, rather than immediate family.
Income Tax
Gifts (lifetime) to charity incorporate a significant income tax advantage. Under the Gift Aid provisions (Finance Act 1990, section 25) an individual is entitled to income tax relief when making charitable gifts. Donations are made net of basic rate tax (20%) and the income tax deducted is reclaimed from HMRC by the charity. For those donors who are higher rate taxpayers, they will be eligible to claim relief against their highest rate of income tax. This reclaim is applied through the Self Assessment process.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
The content of this article is only intended as information and should not be considered as legal advice. Andrew Murdoch cannot be held liable for any loss caused by any act or omission as a result of information in this article.
