If you have recently received a legacy, you could vary the Will to redirect all or part of your gift to charity.
You may wish to ‘tithe’ your entitlement to charity so that the rest of the estate benefits from the reduced 36% rate of Inheritance Tax, or you may wish to bring the taxable part of the estate down in value to within the £325,000 Inheritance Tax threshold (or, nil rate band) so that the estate pays no Inheritance Tax at all.
Why would you vary a Will rather than just make a gift once you have received your inheritance? If the estate from which you are receiving a legacy exceeds the Inheritance Tax threshold, the excess will usually be subject to Inheritance Tax at 40%. Whereas, where an estate makes a gift directly to charity, that gift is exempt from Inheritance Tax, reducing the overall Inheritance Tax due.
A Will is legally varied by using a ‘Deed of Variation’. The Deed effectively re-writes the Will of the deceased for Inheritance Tax purposes as if they themselves had varied their Will prior to their death.
It’s usually best to have a Deed of Variation prepared by your solicitor. The document must:
- Be made in writing within two years of the deceased’s death;
- Be signed by all the beneficiaries who are giving up some or all of their entitlement under the Will - if these beneficiaries are children or lack mental capacity, you may need Court approval;
- Be signed by the Executors or administrators of the Will where the variation increases the Inheritance Tax payable (for example, the family wish to provide some legacy funds for a child in preference to a spouse);
- Clearly identify the part(s) of the estate that are being varied, and say who is to benefit from the variation; and
- Contain a statement that it is intended to take effect for Inheritance Tax and/or Capital Gains Tax purposes, along with the appropriate statutory references.
If the Deed of Variation creates or increases a charitable legacy, it will not be effective for Inheritance Tax purposes unless the Executors can show HMRC that the recipient charity or charities have been notified of the existence of the Deed. You should contact the legacy team at the recipient charity and request an acknowledgement for this purpose.
If your Deed of Variation results in at least 10% of the ‘baseline amount’ passing to charity, the rest of the estate could qualify for the reduced 36% rate of Inheritance Tax. The operation of this relief can be complex, so we would encourage you to seek professional advice and to point your solicitor to the STEP model clause recognised by HMRC.
Example 1
An estate is valued at £625,000. The estate is to be shared equally between 3 nieces of the deceased. |
|
The chargeable estate (£625,000 - £325,000 ‘nil rate band’) | £300,000 |
Inheritance Tax due to HMRC at 40% | £120,000 |
Residue for distribution | £505,000 |
Each beneficiary will receive | £168,333 |
Example 1a
If each beneficiary decided to vary the Will to direct £5,000 from their respective shares to charity, the calculations would change as follows. |
|
Gift to charity from the estate | £15,000 |
The chargeable estate (£625,000 - £325,000 - £15,000 gift) | £285,000 |
Inheritance Tax due to HMRC at 40% | £114,000 |
Residue for distribution (£625,000 - £15,000 gift - £114,000 IHT) | £496,000 |
Each beneficiary will receive | £165,333 |
In effect, each beneficiary can make a charitable gift of £5,000 at a net cost to them of £3,000.
Example 1b
Starting with Example 1 above, if each beneficiary instead varied the Will to direct £12,000 each to charity, the gift would qualify for the reduced Inheritance Tax at 36%, as it is at least 10% of the ‘baseline amount’. |
|
Gift to charity from the estate | £36,000 |
The chargeable estate (£625,000 - £325,000 - £36,000 gift) | £264,000 |
Inheritance Tax at reduced 36% rate | £95,040 |
Residue for distribution (£625,000 - £36,000 gift - £95,040 IHT) | £493,960 |
Each beneficiary will receive | £164,653 |
In this case, each beneficiary can make a more generous charitable gift of £12,000 at a net cost to them of £3,680.
Making a gift into a Stewardship account using a Deed of Variation
In the period immediately following the death of a loved one, selecting charitable beneficiaries for a Deed of Variation may not be a high priority. Family members may have different views on which charities should be chosen or may wish to keep their own charitable giving private from their relatives.
For these reasons, a family might consider using a Deed of Variation in order to redirect the amount given up by each family member into their own Stewardship Giving Account. The Inheritance Tax relief can easily be secured before the two-year deadline, because the gift from the estate is to Stewardship, itself a qualifying charity. But each family member can then take as much time as they need before deciding which charity or charitable causes they would like to support from their own Stewardship Giving Account.
In order to accept a gift under a Deed of Variation, we will need to see copies of the original Will and the Variation. We will provide the acknowledgement the Executors need in order to claim the Inheritance Tax exemption and relief from HMRC.
For more information please see our Guide to Legacy and Estate giving, contact us or call 020 418 8896.
Stewardship may provide general guidance about charitable giving for information purposes only. We do not offer tax, legal or investment advice and you are encouraged to seek advice from a qualified professional on your specific situation.
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