STEP creates model clause for wills to boost charitable giving

The Society of Trust and Estate Practitioners (STEP) today published a draft model clause for wills in response to draft legislation proposing a reduced rate of Inheritance Tax (IHT) where there is a charitable legacy of 10% or more left in a will. To encourage the widespread use of this proposal, STEP has drafted a model clause for wills for use by individuals wishing to leave a legacy which will qualify under the proposed new provisions.

Wendy Walton TEP, Chairman of the STEP Technical Committee said, “HMRC have recognised that the take up of this measure will depend on the extent to which the reduced rate is promoted by charities and by professional advisers. They have encouraged the use of standard clauses and in publishing this draft model clause STEP seeks to encourage charitable giving by making it easy for people to take part in this initiative.”

STEP also welcomed changes made to the proposals since the initial consultation in particular the removal of restrictions on certain categories of asset which required complex valuations such as shares of jointly owned property. Previously only cash, quoted shares or real property could be included.

STEP’s proposed model clause allows people to set aside assets from their estate for the purpose of charitable giving. The model clause is currently in draft and will be reviewed when the final wording of the legislation is known.

Set out below is an extract from our submission to HMRC containing the draft clause and our comments on it.

Draft Clause:

Please note, this clause is in draft only. We are currently working with HMRC to finalise a clause and will publicly release it when it is agreed.

We set out in the Appendix to our previous submission a possible model clause that might be adopted by persons wishing to leave a legacy qualifying for the new relief.

The draft clause requires amendment so as to be consistent with the definitions and structure provided in Schedule 1A. We had considered amending the clause also to encompass the possibility of the legacy being varied under a formula should an election be made for another component to be treated as a single component with the free estate by an election under paragraph 7.

On reflection we have not included such an amendment. This is for two reasons.

Firstly, complexity. Further, in many cases such a provision will not be needed. Such a clause could be drafted on a bespoke basis if it were needed and thought to be possible. Secondly, questions of an unauthorised delegation of testamentary authority might arise because the deceased may be seen to have delegated to others the ability to vary the value of the legacies to charity by making or omitting to make an election under paragraph 7.

We have however included the more limited option of leaving a legacy of 10% or more of an aggregate of the general and other components irrespective of whether an election under paragraph 7 is made. It would then be for the relevant persons to decide whether or not to make an election under paragraph 7 but in doing so they would not alter the size of the legacy. This does not give rise to the concerns mentioned in the previous paragraph. 

APPENDIX

We set out below a possible model clause that might be adopted by persons wishing to leave a legacy qualifying for the new relief.

It would be most helpful to practitioners and taxpayers generally if HMRC would confirm that such a clause (with any appropriate amendments) would be accepted as complying with the requirements of Schedule 1A.

Any clause of a general nature like this would need to be qualified to deal with the concerns set out below.

The first such concern is that a legacy defined by reference to the relief will fail if the estate turns out to be below the threshold for a taxable estate: if there were no TP within paragraph 1(2). Another concern is that a legacy drafted so as to qualify for relief might leave to charity too much as a proportion of the estate passing on the death of the testator. This might arise, for example, if the estate on the death was worth less than anticipated. In such a case there might be a risk that the dependants of the deceased would be prejudiced.

The clause below is designed to provide for a legacy which would qualify for relief but which also contains optional provisos designed to address the concerns mentioned above.

Proviso (ii) addresses the second concern referred to above that the legacy to charity might comprise too large a proportion of the estate on death. The consequence of including the proviso may be that 10 per cent threshold is not met and that relief would not be available subject to a possible election under paragraph 7 if there was another component which was a qualifying component. The proviso includes a number of options. In the event that the proviso is included the testator or testatrix may wish to alter the amount of the legacy or indeed to omit it entirely should the proviso apply. The appropriate option could be adopted.

We have in addition included administrative provisions which while not essential to the clause being effective in attracting relief under Schedule 1A would nonetheless be useful to executors.

Draft clause

1.1          I give [name of charity] such a sum as shall constitute a donated amount equal to 10 (or insert larger figure) per cent (%) of the baseline amount in relation to the [general component] [aggregate of the general, [survivorship] and [settled property] components] of my estate.

1.2          [The legacy given by this clause shall in no event:

1.2.1      be less than £[•] whether or not the lower rate of tax shall be applicable; and

1.2.2      exceed £[•] (the upper limit) even if in consequence of this restriction in the value of this legacy the lower rate of tax shall not apply. [If this proviso shall apply and in consequence the lower rate of tax shall not be payable the amount of this legacy shall [be equal to the amount of the upper limit) [be reduced to £[•]] [lapse].]

1.3          My executors in making payment of the legacy given by this clause:

1.3.1      shall be entitled to accept in full discharge the receipt of the secretary, treasurer or other officer of the charity concerned;

1.3.2      may appropriate assets not otherwise specifically bequeathed to satisfy (or partly satisfy) this legacy without the consent of any beneficiary under my will or any codicil to my will.

1.4          I hereby confer on my executors the power to make or withdraw any of the following elections:

1.4.1      an election under paragraph 7 whether or not the general component is the qualifying component; and

1.4.2      an election under paragraph 8.

1.5          For the purposes of this clause "baseline amount", "donated amount”, "general component”, "lower rate of tax”, "qualifying component”, "settled property component" and "survivorship component” shall have the meanings they respectively bear in Schedule 1A Inheritance Tax Act 1984 and references to paragraph numbers concerning the making or withdrawing of an election are to the paragraphs bearing the same number in Schedule 1A of that Act.

The Society of Trust and Estate Practitioners (STEP) is the worldwide professional body for practitioners in the fields of trusts and estates, executorship and related issues. STEP aims to promote the highest professional standards through education and training leading to widely recognised and respected professional qualifications. STEP also works to demonstrate the value of good stewardship and planning across future generations to governments, professionals, financial institutions and the public. STEP internationally has over 17,000 members, with over 6,000 members in the UK. Over 4,000 students worldwide are currently studying for STEP qualifications and in the UK STEP supports an extensive regional network providing training and professional development.