Technical
Liz Loxton 8 Sep 2017 11:33am

How to spend it

An increase in inheritance tax (IHT) relief for individuals leaving 10% to charities is swelling their coffers. But if relatives unexpectedly leave more to the cats’ home, should we expect more disputed wills? Liz Loxton finds out

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Caption: Image: Phil Hackett

Receipts from IHT have been climbing steeply over the past decade. According to HMRC data, apart from a notable fall between 2007 and 2010, the amount collected via IHT has been on an upward trend in terms of both annual revenue and as a proportion of GDP.

In June this year, statistics released by HMRC showed IHT reaching a record £5.1bn for the 12 months ending May 2017, up a robust 9% on the previous year’s £4.7bn.

Good news for the charity sector lies within these figures. Since the then chancellor George Osborne announced a cut in the rate of IHT from 40% to 36% on estates where individuals bequeathed 10% or more to a charity in his 2011 Budget, charities appear to have benefited. Government statistics show charitable donations bequeathed via wills increasing, with a record £2.5bn left in 2016, up £7m on the previous year. Cancer Research UK was the most popular recipient, receiving £177m in 2016 from bequeaths.

As for the IHT tax relief granted, those figures nearly doubled in very short order, rising from £470m for the 2011-2012 tax year to £880m for 2015-16. When it comes to will-writing time, individuals appear to think charities are preferable recipients than government coffers.

It seems clear then that government action has changed people’s behaviour. Lucy Brennan, partner at Saffery Champness, says that the firm has seen an increasing number of estates using the new relief. “This is one of those examples where tax policy has been used effectively to drive behavioural change; the IHT relief has facilitated the movement of wealth into philanthropic endeavours,” she says. “Indeed, given the reality that changes to wills are not made in knee-jerk fashion, we can expect to see a continued increase in charitable giving through estates over time.”

Sue Moore, technical manager within ICAEW’s Tax Faculty, agrees that the measure has proved to be influential, but appears to be having an impact most where individuals already intended to make charitable bequests. “People do see it as an IHT saver. If you weren’t going to give anything, the numbers don’t work,” she says.

WHAT YOU NEED TO KNOW 

The first point accountants and clients should bear in mind is that the 10% to be bequeathed to a charity needs to come out the net value of the estate, Paul Hodge, tax partner with RSM, points out. Since it’s not often possible to be exact about that value ahead of time, charitable bequests should be clearly defined as such in will documentation. “If the charitable bequest comes in at less than 10% of the estate’s value it won’t qualify, so that needs to be considered with the client and looked at before other specific bequests, to relatives or others,” he says.

Lynne Rowland, partner at Kingston Smith, says considerable calculation goes into determining whether you qualify for the 10% band, so the usual points of discussion around making sure clients’ intentions are clear apply. “Letters of wishes can be hugely helpful here,” she says.

The second point is that the relief, while helpful, does not significantly lower tax bills for other beneficiaries. It is not a panacea that will lower tax and simultaneously increase the net residue of an estate for beneficiaries, Brennan says. “In simple terms, the IHT saving made will largely pay for a charitable donation, meaning that those taking advantage of the offer will likely be those who are already considering some level of philanthropy.”

Tom Elliott, head of private clients at Crowe Clark Whitehill, has seen similar results. Clients already planning to leave significant charitable bequests have been happy to review their wills to ensure the relevant criteria will be met for this relief. However, the assumption that the move is a win-win for taxpayers and charities is not entirely clean cut. “If anything, my concern is that the announcement may have negatively impacted the timing of charitable donations. If a wealthy couple are considering giving substantial amounts to charity, they may consider that the IHT reduction for making the gifts through their wills, which means that they postpone what would otherwise be a pattern of substantial lifetime gifts. The end result is therefore that the charitable causes do not receive those gifts until after the death of the donors,” he says.

“The drafting options for taking advantage of the reduced rate include leaving a fixed percentage of the residuary estate to charity, leaving a legacy based on a mathematical formula to give the minimum amount necessary to benefit, or using a discretionary trust and specifying the amount to be left to charity in a private letter of wishes,” says Charlotte Royal, solicitor at Browne Jacobson. Advisers need to help their clients decide which of these best suits both their wishes and circumstances.

DISPUTES

With the relief directing funds towards charitable giving, is there scope for increased disputes once a will is read? In Ilott versus Blue Cross and Others, a daughter made a claim on her mother’s estate when her mother left it to a number of charities, following their estrangement. “[In that case] the facts were quite unique and all parties involved in the proceedings ended up incurring significant legal costs,” says Laura Harper, senior associate in the succession and tax team at law firm Blake Morgan. “The daughter was awarded just under a 15% share in the estate, so solicitors are unlikely to be encouraging more disgruntled family members to make a claim without very good grounds for doing so, otherwise it is throwing good money after bad,” she says.

In general, disputes involving charities tend to come either from a would-be beneficiary who has been cut out of a will altogether or in cases where the burden of who pays the IHT has not been made expressly clear in the will itself, according to Frank Cook, private wealth partner at law firm Trowers & Hamlins. “We are seeing more claims against estates generally and cases such as Ilott have, if nothing else, publicised the possibility of making a claim,” he says.

However, adds Sarah Banner, partner at Roythornes Solicitors, “a general sea change in attitudes to litigation, increased pressures on millennials to get on the housing ladder, and perhaps an increase in estates owing to the rising cost of property” are also factors behind the trend.

Another exemption that may be worth pursuing with clients is the heritage property exemption. Visit economia.icaew.com for details

ADVICE

Avoiding disputes

Thwarted expectations and costly lawsuits can be avoided with a degree of forethought. “If one does intend to leave a family member or someone who might otherwise consider themselves to be entitled out of one’s will and instead favour a charity, it is worth making a statement of non-provision in the body of the will and storing a memorandum or letter to your trustees containing your wider reasons to as to why you are not benefiting them with your will and how you selected the charities,” says Laura Harper of Blake Morgan.

Discussion can’t start early enough

Discussing charitable giving and philanthropy with clients is often overlooked among private client professionals, says Stephanie Brobbey, senior solicitor with city law firm Goodman Derrick, when it should be fundamental. “We need to raise the issue early in our conversations with clients so we can explore charitable giving with them; whether during their lifetime or on death,” she says.

Publicising the IHT measure may be one helpful move. Accountants and estate practitioners agree that awareness is low. But there are other estate planning tools that advisors can draw to clients’ attention, the recently introduced Residence Nil Rate Band (RNRB), for instance: “For many married couples, the effective nil rate bend for IHT will rise to £1m by 2020. Therefore, many individuals will be able to save significant IHT by simply taking advantage of the RNRB rather than including complex provisions in their wills,” says Cook.

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