Looking after Flash and his friends could save inheritance tax

Q I read recently that fashion designer Alexander McQueen left £100,000 in his will to Battersea Dogs and Cats Home. I think he also left money to other charities.

I would also like to leave some money to an animal charity and perhaps a sum of money for someone to look after my pet dog, Flash, who is really my best friend. I am worried there would be no-one to look after him if I died. Although I don’t have the fortune that Alexander McQueen had, my house is worth £500,000 and I have some money in the bank. I have no family, and I would not want to leave anything to any friends really as they are all well set up.

MK, Perth

AMany charities rely on legacies as their main source of income. The Battersea Dogs and Cats Home website reveals that 70 per cent (£8.5 million) of its income in 2010 came from legacies. In addition, McQueen reportedly left a further sum in order that his pet dogs could be looked after for the rest of their lives.

If you leave a pecuniary legacy (a sum of money) to a registered charity in your will, its value will be deducted from your estate before the inheritance tax (IHT) is calculated. If you leave your whole estate to charity it would currently be exempt from IHT on your death.

In addition, gifts made to a registered charity before your death are currently exempt from IHT. However, not all charities qualify, and it is important that you take legal and potentially financial advice before taking any action.

Under new legislation coming into force next year, it is proposed that there will be an additional discount for IHT purposes if you leave 10 per cent or more of your estate to registered charities. Not only will a legacy to a registered charity be free from IHT but the remaining estate would suffer less of a tax charge.

IHT is currently charged at 40 per cent on the value of your estate over the nil rate band, currently £325,000. The intention is that a 10 per cent discount would be deducted from the 40 per cent tax rate, giving an effective inheritance tax rate of 36 per cent.

There are other ways of reducing your potential liability to IHT if you decide not to leave all your estate to charity, both during your lifetime and on your death. These include – but are not limited to – gifting (i.e. giving away assets to family members), trusts, tax-efficient investments and other specific products.

As far as leaving a sum to look after Flash is concerned, it would be normal to leave a specified sum, under clear directions as to use, to a trust or relevant carer. An annuity could be set up to provide funds for someone to look after Flash.

l Glen Gilson is a partner and head of private client & financial services at HBJ Gateley.

If you have a question you need answered, write to Jeff Salway, personal finance editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article.