Charities and tax

Aside from the declaration in the 2011 budget that testators who leave 10% of their net estate to charity benefitting from a reduced rate of inheritance tax, charities do not have to pay inheritance tax which means there can be tax advantages in making gifts to charity.  They can also reclaim income tax that arises during the administration of an estate and do not pay capital gains tax, which can affect the way in which the estate is administered.

Inheritance tax

No inheritance tax is payable on assets passing to charities.  However, there could be IHT consequences if the residue of an estate is left partly to exempt and partly to non-exempt beneficiaries. Take a look at our information on leaving residue to IHT-liable and IHT-exempt beneficiaries for further details.

In the 2011 budget it was announced that if a testator leaves 10% of their net estate to charity then their inheritance tax rate will be reduced from 40% to 36%.  This is to take effect from any deaths on or after 6th April 2012 and the government is currently consulting on the details to implement this change.

Deed of variation and IHT

Sometimes an estate is left to charity which includes a property which has been inherited from another estate.  If the two deaths occur less than two years apart and IHT has been paid on the first estate in respect of this property, consideration should be given to executing a Deed of Variation.  By doing this it may be possible to redirect the inherited property to the charity and so save the IHT that would have otherwise been payable, However, the Deed of Variation must be executed within two years of the first death.

Income tax

As charities can reclaim tax deducted from income arising during the administration of an estate (apart from tax credit on dividends), it is important to provide charitable beneficiaries with Statements of Estate Income (R185), giving details of the income distributed during the year and the tax deducted.

Capital gains tax

Charities are not liable to capital gains tax.  If assets are sold by executors during the course of the administration, a capital gains tax liability may arise against the executors if the gain exceeds their personal allowance (currently the same as that for an individual for the year of death and two years afterwards).

This charge can be avoided by appropriating assets to the charities.  The executors sell as bare trustees.  Normally, the beneficiaries must consent and give their instructions for the disposal of the asset.  Bear in mind that, if the asset being appropriated is land, appropriation may involve section 36 of the Charities Act 1993.