When someone has chosen to remember a Charity in their Will it is most likely because they wanted to benefit a cause close to their heart. When it then comes to administering their Estate, it is important to make sure that the administration is as smooth and tax efficient as possible to maximise the benefit to the Charity and to fulfil the deceased's wishes.
There are some key points to keep in mind when administering a charitable legacy:
Notification of entitlement and costs
Charities like to be informed of an interest in an estate as soon as possible. At the outset of an administration the terms and conditions and costs of the firm acting should be agreed. When the Executors of the Will are partners of the firm dealing with the administration it is recommended that costs information should also be given to the residuary beneficiaries, who may be a Charity or Charities.
Information and consultation
Charities have obligations to their trustees and the beneficiaries of their work, which a private individual does not. They also must comply with charity law, or face the full force of the Charity Commission. In order to comply therefore, they need to be able to demonstrate that they are receiving the Charity's full entitlement from an estate.
Regardless of the amount or type of legacy, as a minimum a Charity will require:
- The name of the testator, the testator's last address and their date of death
- The nature of the bequest
If they are residuary beneficiaries they will also require:
- Photocopy of Will and Codicils
- Schedule of assets and liabilities
- Valuation of significant assets
- Estate Accounts
- Form R185 re Estate Income
Appropriation and Capital Gains Tax ("CGT")
Before making the decision to sell any of the Estate's assets it is good practice to discuss whether assets should be appropriated to the Charities. Charity legacy professionals will often be able to help executors to ensure that the maximum value is achieved on the sale of assets and, in this way, help to ensure that the duty of the executors and their representatives is carried out.
When Executors take control of the assets within the Estate they are deemed to have acquired them at their market value at the date of death. When an asset is then transferred to a beneficiary they are also treated as having acquired the asset at its date of death value.
Rather than disposing of assets and paying CGT on any gain in excess of the Executor's annual allowance, CGT may be mitigated by appropriating an asset to a beneficiary prior to sale. This can be achieved by completing a memorandum of appropriation. The Executors can then sell as bare trustees with the beneficiaries accounting direct to HMRC for any CGT attributable to their share of the assets. Charities are exempt from tax on capital gains providing the proceeds of the disposal are applied for charitable purposes.
Alternatively, Charities may want assets transferring to them in specie (e.g. their share of any holdings transferred to their own portfolios) rather than receiving the proceeds of sale. Charities will often be able to provide details of valuers and agents who offer preferential commission rates; therefore, it is best practice to consult them before disposing of assets.
Charities can reclaim Income Tax paid on most income received by the Estate during the period of administration. This includes gross income (such as rent from property, or money received into a client account) on which the tax is then paid by the executors to HM Revenue and Customs. One of the exceptions is dividend payments from shareholdings. Charities cannot claim a repayment on the tax credit attaching to any dividends they receive, although the dividend payment should still be included on the income certificate provided to the Charity by the executors. Executors should provide a signed certificate of income to each Charity beneficiary using Form R185 (Estate Income). Charities will not consider the administration to be complete until they have received the R185.
A R185 should be provided for each year in which there is a distribution (in this instance a distribution will include an appropriation). If no distribution made, the income is rolled up until such time as a distribution is made.
Executors are advised to structure the estate accounts so that estate income (both gross and net) is shown in a separate income account, broken down according to the tax year.
Inheritance Tax ("IHT")
Legacies to Charities usually attract full IHT exemption and pursuant to the Inheritance Tax Act 1984, s.41(b), any tax attributable to a non-exempt share of the residue should be borne only by that share of the residue. This can, however, give rise to problems where a residuary estate is to be divided between exempt and non-exempt beneficiaries.
Executors need to carefully consider how an estate is to be divided when there are a mixture of exempt and non-exempt beneficiaries. They will either receive equal shares of the estate (gross approach) or they will receive an equal net share after payment of IHT (net approach). It is important to make the correct determination because the net approach results in a higher liability of IHT for the estate.
The case of Re:Ratcliffe (deceased)  CHR 19 MAR 1999, which followed the case of re: Benhams Will Trusts  STC 2010, established the principle that the gross approach should be applied unless there is wording to the contrary in the Will.
A common error is to deduct IHT from the residue before dividing it between the residuary beneficiaries. The effect of this is that the non-exempt beneficiaries benefit from the exempt beneficiaries' status. However, there are occasions under which Charities may have to contribute towards IHT; for example, where there are non-exempt legacies that exceed the nil-rate band, these will have to be 'grossed up' for IHT purposes, and the tax borne by the residue equally.
Another factor to consider is the reduced rate of Inheritance Tax (from 40% to 36%) which applies where 10% or more of a net estate is left to charity. A Deed of Variation in order to benefit from the reduced rate is worth considering, particularly in estates where there are already charitable gifts.
Disposal of Property
Charities have to comply with Section 117 of the Charities Act 2011 when land held by or in trust for them is sold. Section 117 allows charitable trustees to sell land without a court order as long as the following requirements are complied with:
- The disposition is not to a connected person
- The disposition is preceded by an agreement to effect the disposition
- Before entering into such an agreement, the trustees comply with the procedure set out in s.119(1) or s.120(2) - i.e. obtaining advice from a suitably qualified person on the merits of the proposed disposition
However, if land is disposed of by the Executors during the course of the administration of an estate s.117 will not need to be complied with. S.117 also does not apply where an appropriation has resulted in the land being held on trust where some of the beneficiaries are not Charities.
Nevertheless, where an appropriation has taken place to a beneficiary that is a single Charity s.117 does apply. Likewise, where an appropriation has been made to two or more Charities s.117 applies but in those circumstances the Executors will be the 'Charity trustees' for the purposes of s.117 rather than the trustees of the individual Charities.
There are a multitude of additional considerations when administering a legacy to charity. This highlights the importance for Executors to seek professional advice when dealing with such Estates to ensure their duties and the deceased's wishes are fulfilled.