Charities and Not For Profit
Bequests and lifetime giving
Charitable organisations rely heavily on gifts made by individuals. These can be given through gift aid or via will by a pecuniary legacy or a residuary legacy.
Gifts made to registered charities during lifetime are eligible for Gift Aid. Gift Aid is a UK tax incentive that enables tax-effective giving by individuals to charities. Any cash donations that an individual who is subject to UK income tax makes to the charity after making a declaration are treated as being made after deduction of income tax at the basic rate (20% in 2011), and the charity can reclaim the basic rate income tax paid on the gift from HMRC. For a basic-rate taxpayer, this adds approximately 25% to the value of any gift made under Gift Aid. Higher-rate taxpayers can claim income tax relief, above and beyond the amount claimed directly by the charities. The rate of the relief for higher-rate taxpayers in 2011 is usually 20%, the difference between the basic rate (20%) and the higher rate (40%) of income tax.
Charitable bequests in a will are also free of inheritance tax. With careful planning they can be a way of reducing the value of your estate subject to inheritance tax liability. The current inheritance tax threshold is £325,000 (2011/12) or £650,000 for married couples or civil partnerships.
There are various ways to help a charity in a will: A pecuniary legacy or a residuary legacy?
A pecuniary legacy
A pecuniary legacy is a gift of a specific sum of money.
It is worth bearing in mind that the value of a pecuniary legacy will decrease the longer you live, as the cost of living increases. For example, £1,000 today can buy far less than it could buy 10 years ago. It is likely that £1,000 in 10 years’ time will be able to buy you even less that it could today.
It is possible to link the value of a pecuniary legacy with the “Retail Price Index” to ensure that the gift keeps pace with inflation. Whilst it is possible to do this, it is advisable to seek specialist legal advice to ensure that this provision is correctly included.
A residuary legacy
A residuary legacy is a fraction or all of the remaining part of an estate once family and friends have been provided for.
A gift of the whole of a residuary estate to a charity would usually be inheritance tax free. However, if there are other tax free gifts in the will, it is worth taking professional advice to ensure that a named charity will receive what you intended.
With effect from April 2012 there will be a new inheritance tax (IHT) relief to encourage gifts to charity. The proposal, introduced by the 2011 budget, is intended to reduce the rate of IHT payable on estates from 40% to 36% if 10% of the taxable estate passes to charity. The relief will only apply on death – not on lifetime gifts.