Most of the funding for charities in Britain comes from legacies. If an individual dedicates money to a charity in his/her will, that is known as a legacy. This is something that a lot of people choose to do.
The will is an important document. Without a will, the property will be considered bona vacantia, and could possibly end up being owned by the Crown. It is possible for an individual to write their own will, but it is better to have a legal expert, such as a solicitor do it. Solicitors can also help in optimizing the will to provide maximum benefit to the beneficiaries of the will.
Leaving a legacy
Everybody would prioritize their family or friends as the beneficiaries in their will. However people do dedicate a portion of their wealth to charities in their wills. These “gifts” are known as legacies.
Legacies are one of the primary funding sources for UK charities. Many charities derive a large portion of their earnings from legacy donations.
It is all too common to find a Legacy section on the website of a charity. The section usually has the registration number of the charity, bespoke forms and the necessary contact details. Leaving a legacy is usually as simple as a incorporating a single sentence in the will.
It’s best to notify the charity in consideration that a donation has been dedicated for it. That will allow it to take stock of its finances and plan accordingly.
Legacies can be categorized into three types:
• A fixed amount (Also called Pecuniary)
This seems fairly straightforward, however it is to be noted that a fixed amount would be subject to the effects of inflation. That means the value of this gift, when adjusted for inflation, could decrease as a result. If the rate of inflation is high, then the value of the gift will proportionally decrease. In order to accommodate this, the individual should regularly review his/her will or link the amount to the inflation rate.
• A portion of the estate’s net value (Also called Residuary)
In a residuary, a fixed percentage of the net value of the estate in consideration can be left to charity. This is after all other inheritors have received their respective shares in the will.
• Specific possessions
In this case, it is up to the individual to decide what possession they want to leave to the charity. Typical though, this comprises property, land or shares
A solicitor is usually the best person to advise on what kind of a personal possession can be dedicated as a gift to a charity.
If a person has already written out their will, but decide to leave a legacy, they can make the necessary addition or modification without having to rework their existing will. This modification is known as a codicil. Solicitors can advise on how to add codicils to the current will
Legacies can be used to create financial benefits for an individual’s family. Leaving a legacy (either to a Community Amateur Sports Club or a charity) results in that value being subtracted from the value of the estate, hence reducing the value which is applicable for Inheritance Tax calculation. Hence, leaving a legacy could also aid reducing the worth of your estate to a level where it could be exempted from Inheritance Tax. According to the latest policy, this threshold could be till £425,000. It was previously £325,000 however individuals can now claim an additional allowance of £100,000 (provided all the necessary conditions are met).
According to the website of the British Government, the rate of Inheritance Tax can be decreased to 36% if the amount left to charity is equal to or more than 10%. It would be best to seek the advice of a solicitor to best use this concession to one’s advantage. Gifts that have been incorporated into the will seven years prior to the individual’s death can also be exempted from
Inheritance Tax calculation
Stratified probate fees could possibly decrease income from legacies
The Ministry of Justice plans to do away with the flat fee that courts charge for probate applications and launch a structure that links the fee to the estate’s value. According to the law firm Bircham Dyson Bell, this would have an adverse impact on the funding for charities.
Possible reduction in legacy income
Charities could be looking at a major reduction in income from legacies, one of their primary sources of funding.
The Ministry of Justice wishes to eradicate the current £215 probate application flat fee and put in place a new, stratified arrangement that links the amount of probate fees to the different strata of estate values, as delineated by the government. Under this, the probate fees for an estate worth £500,000 would be £4,000.
According to Nicola Evans, at Bircham Dyson Bell, the new fee essentially becomes a new tax along with Inheritance Tax. It bypasses the reliefs and exemptions that were part of Inheritance Tax, especially the exemption laws pertaining to charity.
This new structure would particularly be unfair for charities that were the beneficiaries of any estate. It is well known that income from legacies is one of the primary sources of funding for charities. The Ministry of Justice appears to not have accounted for the adverse impact this would have on the sector.
The Ministry of Justice has made publicly available the response it got upon the consultation it carried out with respect to its proposed changes in the probate fees. 63 people thought that basing the fee on the estate value was fair. 695 did not think so.
In spite of that, ministers are pushing ahead for the new structure. They intend to do so by way of a Statutory Instrument and want to introduce the structure by the month of May.
Author – Jeffrey Avery