Welcome to the August 2017 newsletter from Chamberlains
A fairly brief late summer edition. I’m writing this on Bank Holiday Monday, and it’s sunny outside!
In the last two months I’ve written about Inheritance Tax (IHT), and there are a couple of further points to make.
Then, as you may know, we deal with a lot of charities –mainly helping with year end accounts and doing audits and independent examinations. Trustees generally take their responsibilities seriously, but a reminder or two may be helpful in the light of recent bad publicity (one had naughtily been taking a salary!)
INHERITANCE TAX – EXEMPT GIFTS
I mentioned that certain legacies help to reduce IHT payable, including gifts to political parties and gifts to charities. The basic idea is that if your uncle leaves net assets (his estate) of £400,000 entirely to you, (see column A in the table below) £75,000 will be taxed at 40% ie. £400,000 minus £325,000 (there’s only one £325,000 nil rate band because he was never married,) But if he left £5,000 to a charity or to a political party, only £70,000 would suffer tax at 40% (Column B).
Two points to clarify: firstly, only the larger political parties count. The party must have at least either two MPs from the last general election, or one MP and nationally at least 150,000 votes given to candidates who were members of that party. This means, for example, that UKIP qualified between the 2015 and 2017 general elections but now don’t (no MPs), but that the Greens do, thanks to their continuing one MP, despite a slightly lower national vote than UKIP (525k cf. 593k votes). Yet another quirk of the UK political system!
The second, more major, point is about legacies to charities. You may remember that I said that if such legacies total more than 10% of the net value of the estate, IHT is at 36% instead of the normal 40%. But I need to clarify that the 10% is calculated on the estate MINUS the nil rate band. This means that it’s much easier to achieve. Your kindly uncle only needed to leave £7,500 to charity (column C below), ie. 10% of the net £75,000, not £40,000 `(10% of £400,000).
|Gifts to charity||–||5,000||7,500|
|Nil rate band (ie. tax-free)||325,000||325,000||325,000|
|Tax at 40%||30,000||28,000|
|Tax at 36%||24,300|
|Estate after tax:|
|Total after tax||370,000||372,000||375,700|
Interestingly, if you look carefully at column C you’ll see that you, personally, only get £1,800 less than column A where he’d left everything to you (£270,000 minus £368,200). In other words, a £7,500 gift to charity has only cost you £1,800. Alternatively, if he was already leaving the first £5,000, to charity you could top it up to £7,500 and you’re £1,200 better off! (£368,200 minus £367,000)
Wills can normally be changed within 2 years of a death, if all beneficiaries agree – so it’s a good idea to check with the person dealing with probate to see whether it’s worth topping up any charity donations. You perhaps need to make sure that they’re aware of the calculations. The legislation is not written very clearly and they may think that the 10% applies to the whole of the net estate, £400,000 in this case, rather than the £75,000 after deduction of the nil rate band. There’s a useful HMRC website to calculate the minimum charity legacy for the 36% to apply: https://www.gov.uk/inheritance-tax-reduced-rate-calculator
Please contact me for a chat if you think that this may be relevant.
As you probably know, these are the people who are responsible for the affairs of a charity – normally volunteers (or people who’ve had their arm bent to persuade them to volunteer!) The Charities Commission website gives a lot of detail about their duties and responsibilities, but in summary they need to do the best for the charity and follow the purposes for which it was set up. This includes not taking advantage of it for their own good.
This was recently highlighted in a case where a Trustee had been paying herself a £31,000 salary – she didn’t realize that it’s not normally allowed… And very little was spent on any other charitable activities – less than 3% in 2015, as compared to the average 83% of charities in general. Trustees are allowed to claim justified expenses, for example travel to meetings, phone, postage, perhaps childcare costs, but a charity can’t employ a Trustee unless the governing document allows it. This means that it has to have been approved by the Charity Commission – which rarely happens.
But it’s not just the Trustee themselves – the restriction is extended to people connected to them. This is not only their spouse. It goes as far as brothers or sisters in law and business partners. It is possible for them to be employed, but the related trustee cannot take part in the hiring process and the Charities Commission still need to give permission.
Having said that, it is possible to pay the Trustee for services rather than for acting as a Trustee – for example plumbing, specialist services, providing meeting facilities, etc. This may be rather ambiguous, so the Charities Commission gives good guidance – https://www.gov.uk/guidance/payments-to-charity-trustees-what-the-rules-are There must be a written agreement about the services to be provided and their cost, it must clearly be in the charity’s best interest for the Trustee to carry out this work, and the relevant Trustee can’t have any part in the decision. Not more than half the Trustees of any charity are allowed to do this extra, paid work.
There’s an interactive form to complete on the web page above. Some payments are accepted; others require submission of extra details to the Commission. Interestingly, when I just had a play with it, it shows that an existing employee can be appointed as a Trustee and can continue to be employed, so long as the Trustees have a power to do this (ie. so long as it’s in their governing document.) However, they must ensure that the member of staff will not attend any part of any Trustee meeting at which their remuneration is discussed.