When your charity receives a legacy, tax is often one of the areas that raises the most questions. Estate administration can be complex. The wording of the will, the types of assets involved and the mix of beneficiaries can all affect how tax is calculated. While charities benefit from valuable exemptions, it is important to ensure these have been applied correctly.
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Expert legal guidance to help your charity grow, manage and protect legacy income.
The technical aspects of estate taxation can be intricate. We provide straightforward advice to help charities navigate these issues with confidence.
Our Charity Assist team works alongside charities to review tax matters arising in estates, providing clear and practical guidance so you can feel confident that your entitlement has been calculated properly to maximise the value of the legacy.
Inheritance Tax (IHT)
Gifts to UK registered charities are generally exempt from Inheritance Tax. In some cases, where at least 10% of the net estate is left to charity, the rate of IHT on the rest of the estate may reduce from 40% to 36%.
However, estates (and, in particular, those that may be subject to Inheritance Tax) are not always straightforward. Issues can arise where:
- The tax burden has not been shared in line with the will or the donor’s intention
- The reduced 36% rate has been miscalculated
- Reliefs or exemptions have not been fully claimed
- The residue has been apportioned incorrectly
Where both charitable and non-charitable beneficiaries are involved, careful calculations are required to ensure the charity’s exemption has been properly applied.
We review estate accounts and tax summaries in plain English, explaining what they mean and highlighting anything that may need clarification.
Capital Gains Tax (CGT)
If estate assets increase in value between the date of death and their sale, Capital Gains Tax can arise during the administration period.
Although charities are generally exempt from CGT when assets are used for charitable purposes, the estate itself may still incur tax depending on how assets are handled.
In some circumstances, the timing or structure of asset disposal can affect whether tax arises. It is possible in many cases to avoid a CGT liability, or at least reduce it, if the personal representatives give the assets to the benefiting charity prior to the assets’ sale.
We can help you understand if asset disposal has been carried out appropriately and if all available exemptions and tax planning opportunities have been considered.
Income Tax during Administration
An estate can be subject to income tax if interest, dividends or rental income has been paid in during the administration period.
Whilst charities are usually entitled to receive income free of tax, it depends on how it has been calculated and allocated between the beneficiaries.
We work with charities to ensure the correct amount of tax is paid and the relevant R185 certificates prepared so a repayment claim can be made.
Deeds of Variation
There are times when the beneficiaries of an estate may wish to alter how it is to be distributed after the deceased’s death.
This is usually achieved by drawing up a Deed of Variation, which allows beneficiaries to redirect all or part of their entitlement to someone else, such as a charity.
As long as the Deed of Variation is completed within two years of death and in accordance with the relevant tax legislation, it can be treated as if the gift was made by the deceased for IHT and CGT purposes. Sometimes, this can create tax efficiencies for the estate or increase the amount passing to charity.
You may be asked to consent to, or become party to, a Deed of Variation if your entitlement is affected. In these circumstances, you must be satisfied that agreeing to it is in your charity’s best interests and is consistent with your duties as a trustee.
We are here to offer advice and assistance to charities who are faced with a Deed of Variation. We will discuss the legal and tax implications of the proposed changes and help you understand the impact it will have on your charity’s entitlement. With our support, you can ensure informed decisions are made and properly documented.
A collaborative approach
Our expert Charity Assist team works constructively with executors, solicitors and charities to make sure everyone understands how tax liabilities arise during estate administration and resolve queries proportionately. With our help, you can demonstrate appropriate oversight, whilst maintaining positive relationships throughout the process.
