The total amount of Inheritance Tax Relief claimed against charitable donations made in wills has hit a record high, up 7% on last year* to £630 million, says Wilsons, the leading charity law firm.
Wilsons estimates the total value of bequests from estates over the Inheritance Tax (IHT) threshold last year at £1.6 billion. Bequests from IHT eligible estates account for the overwhelming majority of all legacies to charities, which stood at £1.9billion in 2013.**
Wilsons explains that the increasing popularity of leaving legacies to charities is driven by the increasing value of estates due to rising stock markets and house prices. Demographics are also a factor, as longer lifespans mean that the main heirs in wills are increasingly likely to be well into adulthood.
However, while there may be more ‘spare’ cash available for people to leave to charities, large charitable bequests are increasingly putting the charities that receive them in conflict with a will’s other beneficiaries.
Comments Tim Fullerlove (pictured), Partner Tax and Trusts at Wilsons: “The main heirs in wills are now often of an age where they have already achieved a reasonable level of financial security. That means that their elderly parents no longer feel an obligation to leave them everything, and are more likely to set something aside for charitable causes.”
“These bequests may be very sizeable sums, which is a big incentive for heirs to go to court to contest the will.”
“Older wills can be particularly problematic. A homeowner’s will drafted in the 1980s leaving fixed amounts to family members and the rest to charity may well result in the heirs arguing that they would end up with a far smaller proportion of the total than was really intended.”
“Updating wills to reflect changes in asset values can avoid this kind of conflict.”
Amount of IHT relief claimed against charitable legacies
Government could encourage more charitable bequests by aligning incentives with the way people give
Wilsons say that the amount of IHT relief claimed against charitable bequest is unlikely to have been influenced significantly by rule changes designed to encourage charitable bequests. From April 2012, any estate in which 10% or more of the total value was left to a charity has been taxed at a rate of 36% instead of 40%.
The changes mean that anyone planning to leave 4% or more of the IHT-eligible portion of their estate to charity would leave more for their other beneficiaries by raising the value of the charity legacy to 10%.
However, Wilsons say that the tax incentive to leave legacies to charities is not aligned with the way that people donate.
Explains Tim Fullerlove: “With the exception of the very wealthy, people rarely make divide their wills on a percentage basis, because they prefer more certainty about who will get what.”
“Even after the inheritance tax threshold for a couple is raised to £1million, there will still be plenty of ordinary families over that threshold who will benefit from some simple tax planning.”
“If people knew that increasing their donation to charity by a fixed sum, rather than an abstract percentage, would decrease the overall tax burden on their estate, then that would be a more powerful incentive to donate more.”
*2014/15 tax year
**Latest data available from the Charities Aid Foundation