Where there’s a will…

As part of the government’s Big Society initiative, Chancellor George Osborne stated that he wanted to make the habit of giving 10% of your estate to charity “the norm in our country”. The catalyst for this has been to introduce a tax break for individuals who choose to leave at least a tenth of their estate to charity when they make their will.

Inheritance Tax is usually paid at the rate of 40% on the net value of your estate at the date of death on anything above the tax free band (currently £325,000). For example, where a person has an estate worth £500,000, they might face an Inheritance Tax bill of £70,000 on death. The new Inheritance Tax rules came into force in April this year and now provide that, where a person leaves 10% or more of their estate to a registered charity, Inheritance Tax on the rest will only be charged at a reduced rate of 36%. It is hoped that the reduced rate will encourage those with relatively large estates to consider thinking of a charity when they make their will, not only to help secure the future of a charity that they wish to benefit, but also to mitigate their liability to the taxman on death.

The new legislation applies to deaths on or after 6 April 2012, regardless of when the will was made. However, on closer inspection, it seems that the rules are not as simple as they might initially appear. For example, it is not simply a case of saying in your will that you wish to leave 10% of your estate to charity. HM Revenue and Customs has provided lengthy guidance on its website explaining the rules in great detail and giving some suggested wording to be included in a will that would qualify for the new rules. The suggested wording goes on at some length and many people will inevitably find the small print difficult to understand.

In a nutshell, when the taxman comes to work out whether or not you qualify for the reduced rate of Inheritance Tax, he will split up your estate into three separate parts. Put simply, these parts are categorised as follows:
• Assets that you own jointly
• Assets that are held in a trust for you
• All other assets (the ‘general part’).

When the 10% test is applied, it is applied separately to each part (or component) of your estate and each part needs to be above the 10% threshold or it will be discounted for the purposes of qualifying for the reduced rate in Inheritance Tax. To take an example, if someone held a half share in a jointly owned house worth £500,000 and £20,000 cash in the bank, the taxman would treat each asset separately when he applies the test. So, in this case, if the individual decided to leave £2,000 of the cash in the bank to charity, the rest of the cash would only be taxed at 36% rather than 40%. This is because £2,000 represents 10% of the general part of the estate, excluding the value of the jointly owned house. In short, if someone has a lot of different types of assets, they will need to take advice on exactly how to frame the will if they want to make sure that they qualify for the 10% test across the board. The test is an ‘all or nothing’ test, so a gift of say 9% will not give rise to any relief at all.

Another oddity of the rules comes out when you start to do some calculations applying the rules that have been set out by HM Revenue and Customs. A key message that has emerged is that if you are going to leave 4% of your estate to charity in your will, you may as well leave 10%. The reason for this is that, ironically, the way the rules work means that the cost to non-charitable beneficiaries of a 10% legacy will be the same as the cost of a 4% legacy. In other words, once the new rules have been applied, any family and friends that are mentioned in the will would actually end up receiving more money from your estate if you were to leave 10% of your estate to charity than they would if you were to leave only 4%. Here is an example to illustrate how this works.

If someone has an estate worth £1.5m the tax payable and the amounts left under the will would be as shown in the table

This example illustrates that if you were thinking of leaving anything between 4 and 9% to a charity then you might as well increase it to 10% because everyone will then be better off (except the taxman of course!). The result of this is that if an arts charity is notified that it is due to receive a portion of someone’s estate, it may be in the interest of all the beneficiaries for the will to be varied so as to ensure that the sum passing to the charity meets the 10% test. That way, the whole estate can benefit from the reduced rate of Inheritance Tax that is on offer, and all the beneficiaries (including the charity) receive an increased sum.

Charity representatives ought to be aware of the new rules and, in addition, might consider ways of alerting potential donors to the benefits so that they can instruct a solicitor to update their wills accordingly.

The approach of the Edinburgh Book Festival (see case study) is likely to be typical of many arts organisations that are looking to piggyback on the incentives offered by the new rules on Inheritance Tax. While the subject of death and taxes is not always an easy one to broach, with a good understanding of the rules and a sympathetic approach, there are positive outcomes to be achieved for arts charities in their marketing and legacy fundraising campaigns.

Peter Shand is a Partner at Murray Beith Murray.
www.murraybeith.co.uk

Case study: Edinburgh international Book Festival
The Edinburgh International Book Festival is a good example of an organisation that has spotted the Inheritance Tax benefits on offer. It has just launched its ‘Leave a lasting legacy’ campaign which invites audiences to support the book festival by leaving a legacy in their will. Sadie McKinlay, Sponsorship and Development Manager, says: “The passion our audiences and Friends display for the book festival suggests many would be keen to ensure this well loved, world-class event can continue for future generations. We launched our legacy marketing campaign with a specifically designed bookmark distributed during the 2012 festival, aiming to raise awareness that we are a charity and a potential recipient of a legacy gift. We are mailing it to specific groups of our audience and to lawyers who may be advising their clients on leaving a gift to charity in their will to reduce their rate of Inheritance Tax. This is just the start of our legacy fundraising; we know that the results might be years away, but feel the investment now in a few materials like the bookmark and leaflet will pay dividends in the future as well as raising awareness now of our charitable status.”

www.edbookfest.co.uk