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At the age of 90, I am about to receive a large compensation payment. I intend to give it all to several charities. How should I go about receiving and making payments to avoid possible inheritance tax and income tax liabilities?
Sophie Le Breton, senior associate in law firm Withers’ private client and tax team, says there are various steps you can take to ensure that your generous donation is tax efficient. The first point to consider is how the receipt of the compensation will be taxed. Depending on what it is being paid for, it may be that you do not need to pay income tax on it. The tax treatment will depend on the precise circumstances under which you are entitled to compensation. A tax adviser will be able to help you further on this point.
In terms of the gifts to charities, gifts to UK registered charities do not have any UK inheritance tax consequences, so there is no seven-year period to worry about. Gifts to certain other bodies can also qualify for the charitable exemption. With effect from this year, though, the inheritance tax exemption no longer applies to gifts to charities based in the EU, Iceland, Liechtenstein or Norway.
It may be possible to mitigate your income tax liability by claiming gift aid, which enables the charity to reclaim from HM Revenue & Customs an amount equal to the basic rate of income tax at 20 per cent.
If you are a higher or additional rate taxpayer, gift aid can provide further relief. The relief extends your basic rate tax band by the gross value of your gifts to charity. For example, if you were a higher-rate taxpayer and made a gift of £1,000 to a UK registered charity, £250 in gift aid could be reclaimed by the charity and you would receive tax relief of £250. If you were an additional rate taxpayer, the relief you receive would increase to £312.50.
The gifts would need to be reported in your self-assessment tax return to claim relief. It is also possible to claim relief for gifts made in the current tax year, not the year to which the self-assessment return relates.
To make a gift aid donation you must have paid sufficient UK income tax or capital gains tax. Care needs to be taken not to overclaim gift aid, as relief received by the charity could be recovered from you if you have insufficient income tax liability.
Who should inherit my crypto keys?
To whom should I leave my digital keys in my will? I have a modest amount of investments (currently around £185,000) in cryptocurrencies and I’ve asked my brother to be an executor, with the intention that his children, both aged under 18, will benefit from this wallet in the future. He is worried about how to manage this and whether the keys should be left to his young children directly, or to him to manage on their behalf. Will this incur any tax liabilities for him until they reach the age of 18?
Henry Lowe, private client partner at accountants Mercer & Hole, says the prospect of your children potentially inheriting a substantial sum under the age of 18 is an understandable concern when drafting a will.
Fortunately, trusts can be written into a will and used to designate a responsible adult to manage the cryptoassets and protect the children.
There are two types of trust you could use, depending on your wishes. The simplest route would be an “absolute” or “bare” trust, which would allow you to name your brother as the trustee. He would be the legal owner and responsible for managing the cryptoassets following your death. His children would be named as beneficiaries of the trust.
The children would be the beneficial owners of the cryptoassets and therefore responsible for paying tax on their share of the income and capital gains that arise following your death. The children may well have all or part of their tax-free personal allowances or exemptions available, so this may be tax-free. The bare trust can retain and reinvest the income and gains or pay out the sums for the benefit of the children. Once they turn 18, the assets will belong to the children, who will have full control over them.
The second type of trust would be a discretionary trust, which is more complex but would offer longer-term control and flexibility. Once again, your brother could be a trustee with the children as beneficiaries. The income and capital would be taxable on the trust rather than the children.
Our next question
I bought a second home in Hull for £38,000 for which I paid 100 per cent of the purchase price with my friend, then seriously ill. We bought the property as tenants in common rather than in joint ownership, as was my intention. My friend died in 2001 with no will or known heirs. As I often worked abroad, I never got probate. The house was left empty.
Now, aged 78, I am anxious to sell up but can’t, as getting probate is too complicated. I am also being charged double council tax on an empty property. How do I get probate in the light of this and finally gain closure?
Your brother, as trustee, could choose to pay out the income (depending on tax rates overall based on your children’s rates and allowances) or the capital. The children would not obtain control of the crypto assets when they turn 18, but these would continue to be legally owned and managed by your brother as trustee until he chose to distribute them. There are likely to be additional costs and tax under this option, but it would have the benefit of providing longer-term control.
Whichever option is chosen, it is essential that you provide clear instructions on how to access the cryptoassets (for instance, keys and passwords) and an inventory so that they will be accessible in the event of your death. If you wish you could appoint both an executor and your brother as a “digital executor” so that he only is responsible for dealing with that element of your estate.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com
