Tax breaks for legacies mean charity can begin at home

A new government tax break could pay dividends for anyone worried about leaving their families an unwanted tax burden when they die, yet few people in Scotland are ready to take advantage, research suggests.

Britons will waste some 1.3 billion this year because of poor inheritance tax (IHT) planning, according to the latest Tax Action report from unbiased.co.uk. Some of the simplest steps, such as making a will and leaving gifts to charities, are among the biggest missed opportunities.

Including charity legacies in wills is an effective way of reducing the IHT bill left to beneficiaries and the advantages of doing so were boosted in March when the Chancellor announced an IHT discount for people leaving 10 per cent of their estate to charity.

Yet only one in five Scots say they intend to leave money to charity, according to new research from Standard Life. It backed up a survey last month by Turris Wealth Management which found that just one in ten Scots would give 10 per cent of their estate to charity, despite new rules offering an (IHT) discount if they do so.

Just over half of Scots say they will leave a will, according to Standard Life's 2011 wills and trusts research report. But of those that have already written one, more than a third haven't reviewed it in the last three to ten years, while 12 per cent have not looked at in more than a decade, the Edinburgh-based insurer revealed.

And failing to keep a will up to date could prove costly, claimed Julie Hutchison, head of estate planning at Standard Life, who said wills could quickly become dated.

"There were significant alterations to the IHT rules in 2006 and 2007. Add to that changing family dynamics, including divorce, more children, and introduction of grandchildren, and old wills could be seriously out of date," she said.

There are very good tax reasons for drawing up a will or looking again at an existing one. All donations made to charity are exempt from IHT, a trap into which more families are set to be dragged over the coming years following the government's decision to freeze the threshold at 325,000.

Alan Sharp, partner in the private client department at Anderson Strathern in Edinburgh, explained: "Whatever you leave to charity is taken from the estate before the IHT is calculated.So if you leave 100,000 to charity you are saving 40,000 of tax, meaning the tax bill facing the beneficiaries is lower and the tax coming out of their legacy is a bit less."

Most people who leave legacies are those without families to whom they can pass their assets, or who feel no obligation to provide for family members.

"In these cases the normal IHT issues don't apply so they don't need to worry about the size of their estate. You also have people with substantial sums of money who can afford to be philanthropic as well as providing for their family."

Malcolm Rust, partner at Shepherd and Wedderburn in Edinburgh, said the tax advantages of charity legacies for people who have families and potential IHT issues are "considerable".

Yet it is those who do not have family members to whom they can bequeath their estates who tend to be most familiar with the concept of tax-efficient charitable legacies.

"I have a number of clients who have deliberately structured their wills to allow the taxable portion of their estates up to the nil-rate band to pass to close friends, but to leave everything else to charity, or in a few cases to their own charitable trust," said Rust. "That structure is quite common, and effectively utilises the charitable relief in conjunction with the IHT allowance."

There's now an added incentive for those facing an IHT bill to leave money to charity. Under plans outlined in the Budget in March and being consulted on this summer, a 10 per cent IHT reduction is to be granted where at least 10 per cent of a person's net estate is left to charity on death.

The rule will only be relevant where an estate is subject to IHT in the first place, which, for married couples using their double nil-rate band, means assets worth more than 650,000.

But Rust doesn't expect the move to make any noticeable difference to donation levels, as many people view charity giving as being at the expense of the family.

"I have my doubts about the effectiveness of this measure to alter people's behaviour. As the old adage goes, charity begins at home and for many more now caught in the grip of severe financial pressures, never was a truer statement perhaps uttered."

The IHT offer is only likely to encourage more donations from those who already intend to give, agreed Sharp. "It may make a marginal difference if you are minded to make a bequest to charity anyway. Anyone giving away just short of 10 per cent of their estate will make sure they meet the threshold so it will encourage them to give more.

"But I don't think that the grant in itself will incentivise people to give to charity if they are not otherwise minded to do it"

There is another reason to consider charities when drawing up a will - they may well pay for it.

Many charities now offer to cover the cost of preparing a will in the hope that they will be included among the legacies.This has been reasonably successful for charities, with people often leaving them the money they saved by not paying for the will.

Such schemes are increasingly commonplace as cash-strapped charities seek to boost donation levels. That can only help boost awareness of the ways in which charity giving can make financial sense and experts believe it is set to become a bigger part of the tax-planning picture over the coming years.

Hutchison said: "I think that philanthropy will be an increasing part of the advice picture for those wealthier people who are able to make the most of the tax advantages on offer."