Last month we looked at the subject of charitable legacies and the various ways a Will can be structured to ensure that not only the lower (36%) inheritance tax rate is achieved but that the testator's practical aims are achieved.
With the problems of aggressive litigation, our conclusion was that a trust route may often be more appropriate than leaving specific legacies (or worse still, the residue) to named charities. As it happens we have recently had two more interesting decisions on this subject which we will also consider.
IHT-efficient charitable legacies
First, a refresher of some fundamentals.
To qualify for the IHT relief, the legacy would need to be left to one of the following:
- A charity for UK tax purposes - that is a charity or other organisation in the UK, European Union Member State, Iceland or Norway that would be a charity under the law of England and Wales (if it were located in England and Wales); or
- Settled into trust to be used for charitable purposes only; or
- A Community Amateur Sports Club.
Relief from IHT for charities is given under section 23 IHT Act 1984. This broadly states that property is given to charities if it becomes the property of charities or is held on trust for charitable purposes only. The definition of charity in Finance Act 2010 Schedule 6 Part 1 includes the condition that charities must be subject to the jurisdictions of a UK court or that of another EU member state.
Of interest here is the recent Court of Appeal decision in the case involving a legacy from a UK taxpayer to a Jersey charity (Routier and another v HMRC  EWCA Civ 1584 and the earlier one  Civ 938).
In an adjourned appeal heard this year the Court of Appeal has held that the restriction of the charitable exemption from IHT under section 23 of the IHTA 1984 to legacies to charities governed by UK law does not violate the EU law principle of freedom of movement of capital. Frankly not really surprising, especially after the recent disclosure of the tax arrangements made by Apple and Lewis Hamilton (see "Paradise papers"), to find out that Jersey is not part of the UK for the purposes of EU freedoms. Back in 2016 the Court of Appeal upheld the High Court decision that HMRC's refusal of the relief on the basis that it did not apply to gifts made outside the UK was correct even though the Court accepted that the trust in question had only charitable purposes as a matter of English law.
It should go without saying that the clients/their advisers should satisfy themselves that the intended charities qualify.
One further point to remember is the need to ensure that you correctly name the charity you want to benefit. For example, legacies left to "Red Cross" have been known to cause confusion, due to the fact that the Red Cross movement comprises a number of different parts, including the International Committee of the Red Cross and 190 individual national societies.
An outright legacy or a charitable trust?
If the testator knows exactly which charities they want to benefit, that ostensibly would be the easier way to leave a legacy. In such a case all that would be required is to verify that the intended beneficiaries are indeed qualifying charities. Often legacies are left to schools or clubs or foreign institutions and not all of them will qualify as a charity for the purpose of the 10% IHT reduction.
There may, however, be a really good argument against naming a specific charity, namely that you may not be able to change your mind.
A recent High Court decision (not yet reported) in the case involving a Will of the property tycoon Michael Collins, age 78, who suffers from dementia, should serve as an excellent argument against naming specific charities as Will beneficiaries with absolute entitlement.
Mr Collins made a Will in 1990 leaving almost all his assets to the National Trust. In 2014 his wife died and, while her solely owned assets passed to various charities (the couple had no children) her share of their jointly owned assets passed by survivorship to her husband.
Both Mr and Mrs Collins fell out with the National Trust many years ago and the Judge dealing with an application to vary the 1990 Will accepted that Mr Collins now felt "strong antipathy to the charity". Nevertheless, he ruled that Mr Collins' Will could not be altered because he lacked mental capacity.
In 2007 Mrs Collins did apparently make an application for a statutory Will (that is a Will executed on behalf of someone who lacks mental capacity) to be executed on behalf of her husband (needless to say opposed by the National Trust) but she later dropped it. The result is that the National Trust is in line to receive several millions on Mr Collin's death, despite the donors' well documented changes of hearts.
This case should also be a reminder that Wills need to be reviewed from time to time as circumstances change.
If the client is not totally certain about which particular charities should benefit outright, or in any event if a scenario, such as that encountered in the Collins case is to be avoided, the option would be to include a charitable trust in the Will or leave a legacy to your own charitable trust set up during lifetime. We will look below at the requirements for such a trust to qualify as a charitable trust.
A charitable Will trust or a legacy to a lifetime charitable trust?
While for IHT purposes it will not make any difference whether the legacy is to an existing charitable trust or the charitable trust is established by the Will itself, there are a number of arguments in favour of setting up a charitable trust during lifetime. Firstly, of course, if the client is minded to make charitable gifts during lifetime (and, say, take advantage of the income tax relief on certain donations) then, obviously, a lifetime trust will be needed. The client will also, having registered their trust and nominated the trustees, have the peace of mind that everything has been set up correctly, rather than relying on the executors dealing with those tasks after their death. On the other hand, if no lifetime donations are intended then it would make sense to leave it to the executors to set up the charitable trust, although even then the client, as testator, should be aware of the procedures and formalities needed to set up a charitable trust properly.
Setting up your own charitable trust - a brief guide
There is plenty of assistance available from the Charity Commission, as well as HMRC, on how to set up a charity (and prospective settlors should refer to this or preferably seek professional assistance), so here is just a brief explanation.
There are a number of steps to setting up a charity. First, you need to find trustees for your charity - you usually need at least three. This is clearly the most important task: you need to find people who are willing and are able to make important decisions on your behalf (especially after your death) and who will be able to cope with possibly quite a lot of work, including various aspects of reporting and accounts, obviously depending on the sums involved and the level of discretion given to them.
Next, you must make sure the charity has "charitable purposes for the pubic benefit"’. The Charities Act lists thirteen descriptions of "charitable purposes", including relieving poverty, education, religion, health, saving lives etc. Both HMRC and the Charity Commission have guidelines on how to best word your purposes. The most important thing to remember is that a charity must be for "public benefit" so including your family members, even if the purpose was, say, education, will not do.
Next you should choose a name and structure for your charity. The name should not be similar to the name of an existing charity or be misleading.
As for the structure for your charity, in this article we assume your charity will be set up as a trust although you can choose to set it up as a company limited by guarantee or a charitable incorporated organisation (CIO). Each will require a different "governing document". If you choose a trust then obviously a trust deed will need to be executed. Next, the trustees will need to open a bank account and set up accounting procedures, obviously depending on the sums involved.
Finally, you may need to register your charity. There are in fact two different and separate registrations. First is the registration with the Charity Commission - this is only required if your annual income is over £5,000 or if you set up a CIO. Separate from this is registration with HMRC if you want to claim any tax reliefs, including Gift Aid. There is plenty of guidance on registering a charity on the HMRC and the Charity Commission websites.
If setting up your own charity sounds too complicated, as most likely it will be for most, setting up a discretionary trust with a list of potential charities as beneficiaries, but with the trustees having discretion as to which charities should benefit, may be a simpler choice. A letter of wishes from the settlor should provide further guidance and the problems, such as those encountered in the Collins case, as well as potential litigation where the legacies are fixed, should be avoided.