If an individual wishes to take advantage of the reduced Inheritance Tax rate by bequeathing 10% of their estate to charitable organizations, must this provision be explicitly stated in the Will, or is it permissible to incorporate a power to designate charities along with guidance in a letter of wishes / by deed of variation?
Nothing to stop the original beneficiaries doing a DOV if they want.
I don’t see why the testator can’t just leave the estate to whichever charities the executors decide. If it’s a discretionary trust that has charities as some (but not all) of its beneficiaries, presumably the trustees can just appoint out within 2 years under s.144.
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A Deed of Variation will work.
Will the beneficiaries agree? If no, I would state it expressly in the Will. Is the difficulty selecting the charities?
The problem with charities is that they insist on their pound of flesh even if they end up after costs with 2 ounces each. I find it hard to believe that named charities with fixed interests or as members of a finite class are going to participate in a DOV that gives them less than otherwise. s144 is handy in appropriate circumstances and time limit as it is a unilateral act of the trustees that even a named charity can only expect to challenge on the grounds that the trustees failed to properly consider them at all or for more (a tall order save in a very special situation).
The will precedent I favour is one which allows the trustees of a DT or by exercise of a power of overriding appointment or among them as default beneficiaries to appoint to any charity, as a member of the class of beneficiaries/objects; or for the trustees to have a power to add them. Ideally always with a LOW to give them some idea of the areas of charitable objects favoured by the testator. Properly drawn this is non-binding on the trustees and gives no charity mentioned by name any justiciable right.
Jack Harper
I agree.
I noticed a precedent drafted by a leading London firm that said the appointment must be made within 1 year, rather than 2.
Any idea why this would be the case?
I also noticed a precedent recently that still referred to worldwide charities, where the entire estate was being left to charity. Very dangerous, if you didn’t notice that!
I cannot fathom why a one year time limit would apply to a power of appointment. Presumably a 2 year limit is designed to fit in with s144 and its expiry triggers fixed default provisions. The drafting of the sequence is important. During the 2 year period there must not be a subsisting IIP so the fixed provisions must not apply during that period subject only to the power; they must not become operative at all until it has expired. If the default provisions are not fixed but are themselves discretionary this will not be relevant.
Precedents often do not define what is meant by “charity” or “charitable purposes”. Definitions are important here as always. Mr Kessler’s precedents (which I use primarily) say “any company, body or trust established for charitable purposes only”. These must be read in conjunction with his book and he has sections entitled “Charities as beneficiaries” and “Foreign charities as beneficiaries”. He draws attention to possible interpretation difficulties dependent on whether the testator has in mind a tax definition or a substantive non-tax definition. The latter raises the question, as he does, of which jurisdiction is relevant. Only rarely does a Will contain a governing law clause.
Of course it may well be that a drafter will not delve into this issue at all and so the testator will not have turned his mind at all to it, rather frustrating the basic construction principle, which is: what did the testator intend. All this will only matter of course if there is a dispute. Is it desirable to supply a precise definition? The most likely approach to a default definition is to resort to the substantive succession law of the testator’s domicile. Though “outdated” and “unfair” per HMRC the concept still thrives for English PIL.
If this is England & Wales that should settle it. Sections 1 and 2 of the Charities Act 2011 will apply and if so would apparently exclude Scottish and Northern Irish Charities as well as non-UK charities. A gift to a named overseas charity can be valid but if it fails cannot be the subject of a cy-pres scheme. There might be a doubt about the status of an entity governed by any law within the UK which operates to any extent overseas. The English Charity Commission, at least, says a propos of the public benefit test: “The geographical area does not have to be in England and Wales. An organisation that is set up and registered in England and Wales can be a charity, even if its purpose is to benefit people entirely outside that area”
Some things to bear in mind in framing a more precise definitions are:
1 Many testators will want to secure charity tax exemptions, particularly for IHT. Curiously there is no definition of the two terms for s23 IHTA 1984. But the Act clearly applies to Scotland (see ss 46 and 261) and NI. The two devolution Acts of 1998 make tax a reserved matter, save for rates of income tax in Scotland. Para 1 Sch 6 FA 2010 does define both terms and specifically to include Scotland and NI. That Act was amended by s344 F(No 2) Act 2023 to exclude all overseas charities, wef 1 April 2024 for IHT. Mr Kessler points out that a foreign charity may have a UK-based charity with which it is closely associated to which the gift could be made instead.
2 Scotland and NI have their own Charities Acts of 2005 and 2008 respectively so their charities could be included by a specific reference to the Acts or the countries.
3 Though few UK practitioners are competent to draft a Will for a non-dom they may be asked to advise on the application in the UK to gifts of UK property made by it to foreign charities. Clearly UK tax reliefs will not apply per 1 above. The PIL of the relevant UK country will decide on the validity of the gift, no doubt applying the movable/immovable distinction and perhaps renvoi, but what tax exemptions, if any, may apply will depend on foreign tax laws. A general issue of international succession advice is to consider whether a separate Will for UK immovables is desirable so that local law will apply for certain in a UK court, and probate be simplified; but even if specifically governed by a local UK law in all respects that will not confer UK tax reliefs on an overseas charity.
Jack Harper
I agree with all that you have said.
I am happy to share a copy of the Will with you. It has been admitted to Probate and now is a public document.