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When someone dies with a will leaving gifts to charities, the legacies will need to be administered and tax will need to be considered.

Even though legacy gifts to charity are left tax free, there are three main taxes which may arise during the administration of legacies on UK estates:

  • Inheritance Tax (IHT)
  • Capital Gains Tax (CGT)
  • Income Tax (IT)

Each tax works differently, so it is important that legacy officers understand the tax system and how it might affect your charity’s entitlement. To help, here is a guide to the different taxes!

Nothing is certain but death and taxes Benjamin Franklin


Inheritance Tax

Inheritance Tax is a tax calculated on the value of an estate at the date of death, less very limited expenses (such as debts at date of death and funeral costs).

Everyone receives an Inheritance Tax allowance of £325,000 (nil-rate band or NRB), which can be passed to a spouse through marriage or civil partnership.

There is also an additional residence nil-rate band of £175,000 available, where the primary residence is being passed to a direct descendent. This can also be transferred to a spouse, so in theory, a couple could pass on up to £1 million without needing to pay any IHT.

Once the taxable estate size has been calculated, the appropriate rate of tax needs to be applied – the standard 40% or, in the case of at least 10% of the taxable estate passing to charities, the lower rate of 36%.

Drafting the IHT form is undertaken by the executor (or solicitors appointed by the executors) but the estate and the tax position will be want to be reviewed by a legacy administration officer to ensure this has been calculated and allocated correctly.

It may be possible to vary the legacies as set out in the will by way of a deed of vavriation to make the estate more tax efficient, and this is another issue legacy professionals will consider. A deed of variation rewrites the will after the maker’s death.

Beware double grossing!

Where the estate leaves legacies to individuals (IHT non-exempt) and to charities (IHT exempt), any IHT Tax should be deducted from the individuals’ legacies only, unless the will states otherwise. This is known as apportionment of Inheritance Tax.

In some circumstances, it is necessary to do a grossing up calculation of IHT or even double grossing up. The need for double grossing can be complicated and confuse even experienced executors, so it is important to check the numbers and ensure that your charity isn’t paying any IHT inadvertently from the estate.

Capital Gains Tax

Capital Gains Tax is a tax on the increase in the capital value of an asset. For deceased estates, the base figure is the value of a particular asset at the date of death and Capital Gains Tax may be payable on an asset which increases in value during the period of administration. For example, a buoyant housing market may result in a property being sold well above the probate valuation.

Charities are exempt from Capital Gains Tax and a knowledgeable legacy administrator can advise the executors on whether CGT can be avoided by appropriating the assets with gains to the charities.

This is advantageous to all the beneficiaries, charities and individuals as it will increase the net estate value, but this must be done before the assets are sold, as CGT cannot be claimed later, so it is important that legacy officers establish an early relationship with the executor wherever possible.

Income Tax

There will be two income tax periods in an estate – the first to the date of death and the second whilst the deceased’s estate is being administered. The administration may cover more than one tax year (6 April – 5 April) and income tax needs to be calculated in each tax year at the appropriate rates.

Charities are exempt from income tax but it must usually be paid and then reclaimed by charities or individuals not liable to pay it. In the case of individuals, this is usually because their total income is below the annual personal allowance. Income Tax can be reclaimed if the Executor produces a Form R185E and legacy officers will ask for one, when appropriate.

How to deal with these complications

Sounds complicated? It can be – and it is important to get it right, not least because penalties and interest may be due if too little tax is paid or it is paid late.

However, if charity legacies are administered by legacy administration professionals with the appropriate expertise, then consideration of these issues will be routine and can add significant value to your overall legacy income.

A good legacy officer will maximise a charity’s legacy income and minimise the risk to its trustees by ensuring the administration is correct.

Sharon Wheeler

Want to know more

For more information about the ways we could support your team please contact Sharon Wheeler