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Charities, Legacies and Tax Efficient Giving

Crill Canavan has just completed the administration of a deceased’s complex estate which has taken four years. We have distributed legacies of over £1million to four charities, three of which were Jersey charities. However, the Jersey charities have suffered the burden of UK inheritance taxes which, with a little planning, could have been avoided.

This case serves as an object lesson in how to deal with charitable legacies where a person has assets in England and Wales. Many people may be surprised to learn that even though they live in Jersey, their estate could be subject to UK inheritance taxes.

The deceased (“Mr A”) had investments of just over £1 million, which were held with two brokers. One portfolio consisted largely of UK shareholdings and treasury stock. When Mr A died, these assets constituted an English estate, which brought it within the realms of inheritance tax. The English estate amounted to just over £400,000, creating a tax bill of£54,000.

Under English inheritance tax laws, legacies to charities are exempt from tax. This exemption however, only applies to English registered charities. Any legacies payable to Jersey charities from an English estate are therefore subject to inheritance tax. There are also potential complications where funds are left to an English based charity but expressed to be for its purposes or branch in Jersey. In this case, Mr A left part of his estate to an English cancer charity and asked that it be applied to its work in Jersey.

If the share of residue left to the English charity had been paid purely out of the English estate, then there would have been no inheritance tax. However, the tax authorities in England took a strict view and decided that the charitable legacies and the shares of the residuary estate had to be apportioned between the Jersey and UK estates.

After some research and argument, Crill Canavan were able to reduce the inheritance tax by more than two–thirds by claiming certain reliefs and exemptions. Firstly, certain Government treasury stocks are free of tax to Jersey Residents (this is called FOTRA relief). Secondly, shares in AIM Listed companies are exempt if they are owned for two years or more.

In the case of Mr A, inheritance tax could have been avoided completely if his estate had been structured slightly differently, by directing his charitable legacies through the Charities Aid Foundation. This is an English registered charity which qualifies for inheritance tax exemption, but whose purposes include the benefiting of other charities, including overseas charities. They will direct the legacies towards a testator’s chosen charities and will take a 1% fee – which they then apply to their charitable purposes.

Crill Canavan believes this approach is relevant to a number of our clients. We are increasingly seeing clients who have assets in England – either because they have moved here to work and have decided to stay and have houses or flats in the UK or because they have managed investments which include shares in UK companies. We also regularly advise elderly clients who have no family and who wish to leave their estates to charity – it is very easy for their estates to be caught by the inheritance tax net.

Another factor to bear in mind is that it is possible to change a person’s will up to two years after they have died. Any Jersey based charity which has received legacies in the past two years could be in a position to reclaim UK inheritance taxes by varying the deceased’s estate and redirecting it in such a way that the Charities’ exemption is available.

Whilst the three Jersey charities who benefited from Mr A’s estate have all received a great deal of money, it is frustrating that they could have received another £5-6,000 each with a little more planning.

Any Jersey resident wishing to leave their estate to charity is therefore encouraged to review their Wills if they have assets in the UK.

For further information contact Michael McCabe on +44 1534 601716.