Have your cake and eat it

Gifts that mitigate tax

As you may have seen on page 1, four brave members of Birkett Long entered the Trailwalker UK 2012 in aid of Oxfam and the Gurkha Welfare Trust.  This gruelling walk involved trekking 100km across the South Downs in less than 30 hours, in the toughest conditions recorded by Oxfam.  The constant rain and mud-swamped paths made the walk incredibly challenging but the team triumphed by completing it – with blisters and all – and raising more than £5,000 in the process.

If completing a 100km walk to raise money for your favourite charity is not something that particularly appeals, there are plenty of other ways in which you can give charities a helping hand.

All gifts that are made to UK registered charities through your will, regardless of the amount, are exempt from inheritance tax (IHT).  So not only do you get to benefit a charity, you save money that would have been paid in tax.

The rules for making use of the possible exemptions are complex and we always recommend that you seek advice specific to your own circumstances.  The rules that govern IHT say that the first £325,000 of your estate is not taxable.  Anything over this amount may be charged at 40%, which makes it beneficial to use charitable exemptions where possible. 

There are several options for leaving money to charities through your will.  You can either give a fixed monetary gift or a percentage of your estate.  If you give a minimum of 10% of the net value of your estate to a charity, then the IHT that your estate has to pay is reduced from 40% to 36%.  You could specify that 10% of the net value of your estate is to be given to charity or make a monetary gift that is worth 10% of the net value of your estate.

For example, if your estate is worth £350,000 and you decide to leave £25,000 to a charity, your estate would be valued at £325,000 and would not be subject to IHT.  If you had made no charity gift, your beneficiaries would have received £25,000 more but would have paid £10,000 of that money in IHT, reducing the amount to £15,000.

It is possible to give money to charity during your lifetime in order to reduce the value of your estate.  As well as reducing IHT, this could provide you with Income Tax benefits.

Discounted gift trusts

With the substantial rise in property prices over the last 10-15 years, the £325,000 threshold for IHT can come into reach easily.

In theory a quick solution would be to make substantial gifts and live for seven years.  But although many people would like to give such gifts, in reality they require their investments or savings to provide them with a comfortable standard of living.  Ideally, they would like to have their cake and eat it.

It is possible to keep a slice of that cake through a Discounted Gift Trust (DGT).  This type of arrangement allows people to give away a sum of money yet retain the right to receive an income from it – usually set at 5% per annum to take advantage of the 5% tax deferred withdrawal facility under an Investment Bond.  The balance goes into a trust for the person’s chosen beneficiaries.

It is called a Discounted Gift Trust because the value of the gift may be discounted for IHT immediately.  Factors taken into account include health and age, so the younger and fitter you are the higher the discount.  For example, Mr Smith, aged 65 and in good health, invested £100,000 and took income at 5% per annum.  His insurance company valued the initial slice as £60,000, which means a discount of 60% and a gift of £40,000.  Should Mr Smith survive a full seven years after he made the gift, the total value of the DGT will be removed from his estate for IHT.  The whole value of the bond will be held within the trust but the amount of regular withdrawals paid to Mr Smith will continue.

A DGT plan is not suitable for everyone but assuming you are in good health, likely to live seven years and require an income from your investments, this could be an excellent tool for IHT mitigation.

For information on leaving a legacy to charity in your will contact Kayleigh O’Donnell on 01245 453837 or email kayleigh.odonnell@birkettlong.co.uk

For DGT advice contact Paul Chilver on 01206 217614 or paul.chilver@birkettlong.co.uk, follow @PaulChilverIFA.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.