Charitable giving can maximise the tax efficiency of your will

As I have been unable to find a clear answer, from Revenue or any other source, I was wondering if you would be able to help. My question relates to the tax liability of people with or without dependants who make donations (either financial or an asset) to charities in their wills.

My understanding is that if the estate was say, €1 million, and it was all donated to charity, then the charity would receive the full amount. Is that correct?

If the person had say, two children (which I think would be Group A as defined by the Revenue) with a similar sized estate, could you clarify the position regarding tax?

I assume that each child could receive €335,000 each tax-free which would leave a residual of €330,000. If this €330,000 were donated to charity, would the charity receive the total amount?

Selling a family home under a will and stamp duty

---

Can adopted son claim share of birth mother’s farm?

---

Does selling a share of former home to my family create problems?

---

Is a mortgage top-up or a personal loan best option for home improvement finance?

---

If the will stated that the charity was to receive €130,000, am I correct in assuming Revenue would then tax the remaining €200,000 at 33 per cent meaning that the two children would receive an additional €66,000 each?

Mr A.I., email

I'm a little surprised that you have not found it possible to get an answer to this query from the Revenue Commissioners, as it is one of the more straightforward and unambiguous areas in tax.

Although many charities are heavily funded by government, all rely heavily on the generosity of people, either through gifts made in their lifetime or a bequest left in their will when they die. And the fact that it is tax-free is a key attraction for both sides.

Section 76 (2) of the Capital Acquisitions Tax Consolidated Act 2003 states clearly: "A gift or an inheritance which is taken for public or charitable purposes is exempt from tax and is not taken into account in computing tax, to the extent that the Commissioners are satisfied that it has been, or will be, applied to purposes which, in accordance with the law of the State, are public or charitable."

This clears up several elements in your query. First, it does not matter whether the charity is the sole beneficiary of a will or a beneficiary alongside other people, such as your children. Either way, they benefit from tax exempt status.

Second, yes, the charity receives the full amount of any bequest or inheritance in other form that is left to them. There is no surreptitious clawback by the State or anyone else.

Practical issues

However, there are some practical issues that you will want to consider. Let’s take that notional €1 million estate that you outline. While it sounds easy to apportion it in the way you suggest – €335,000 to each of the two children to maximise their tax-free amount from their parents, with the balance of €330,000 going to the charity – that assumes all of your assets will be held in cash or similarly liquid investments.

But, for most of us, property – particularly the family home – will form a significant part of the equation. Assessing its market value in cash terms is a tricky business. And then there is the issue of whether it is proposed that the property form part of the inheritance of one or both of the children.

It might be simplest to set down in the will that assets are to be liquidated at market rates so that you are simply dealing with a disbursement of cash.

There are three ways you can leave money to a charity in a will. Most common perhaps is what is called a “pecuniary gift”. This is a specific stated amount of money.

The alternatives are a bequest, where you leave a particular asset – jewellery, art or a property maybe – to the charity of your choice, or what is known as a residuary gift. The residue is what is left of your estate after all debts and taxes have been paid and all specific bequests and legacies to family or others have been disbursed. You can chose to leave all or a percentage share of it to your chosen charity.

There is one thing you need to ensure – and that is that your chosen charity meets the required criteria for charity status in the eyes of the Revenue Commissioners. This is what the second part of that section 76 (2) means when it states: “... to the extent that the Commissioners are satisfied that it has been, or will be, applied to purposes which, in accordance with the law of the State, are public or charitable”.

The Revenue has a list of eligible charitable or public groups which can be found herehttps://www.revenue.ie/en/corporate/documents/statistics/registrations/bodies-charitable-exemption.pdf. At 279 pages, it's a pretty comprehensive listing and covers groups that operate domestically and/or abroad.

For clarity, it is a good idea to include full details of the charity or charities you wish to benefit in your will. This includes their full name, their address and, ideally, their registered charity number. Occasionally, charity names can be very close to one another – and then there is the danger of scammers, who can attempt to mimic a genuine organisation.

It’s also a good idea, if you are making specific provision for a charity, to let them know you have done so.

Estate planning

From your letter, it looks like your plan is to maximise the tax-free benefit to your children and then, to maximise the tax efficiency of the distribution of your estate, give the balance to charity. It's worth bearing in mind that the current category A tax-free threshold that applies to inheritances taken by your children from your estate might rise (or fall) between now and the time you die.

The threshold has been as high as €542,544 and as low as €225,000 in recent years. In a previous government, Fine Gael said it would like to raise the threshold over time to €500,000. That promise seems to have been left to one side since then but it illustrates that there is no certainty on the current number.

Assuming your intent is to maximise their benefit, the wording of your will needs to be specific that you want them to benefit up to the category A threshold applicable at the time of your death, with the balance going to a named charity or charities.

Of course, the €355,000 or whatever threshold includes not just inheritances taken from you but also from the children’s mother and any gifts they receive from either of you in excess of €3,000 during your lifetimes.

Finally, you rightly note that anything left to the children above the tax-free threshold will be taxed at 33 per cent.

If you want to leave only a specific amount to charity and are concerned about a tax liability on your children given the balance of what they will receive, you can always spread your assets more widely – leaving specific amounts or threshold amounts to grandchildren, siblings, in-laws and others.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice