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Charitable Trust

Also known as: Charity Trust, Philanthropic Trust

Definition

A charitable trust is a trust established exclusively to benefit registered charities or charitable purposes, giving trustees flexibility to distribute assets to multiple causes while receiving complete inheritance tax relief.

Understanding charitable trusts helps you structure philanthropic giving that adapts to changing circumstances while maximising tax benefits for your estate.

What Does Charitable Trust Mean?

Under UK law, a charitable trust is created solely for charitable purposes as defined by the Charities Act 2011. Trustees manage assets and distribute them exclusively to registered charities or purposes such as education, poverty relief, religion, or community benefit. Unlike direct charitable gifts, charitable trusts provide flexibility through a Letter of Wishes—non-binding guidance about which charities should benefit that you can update without amending your will.

When established in your will, you allocate assets or a percentage of your estate to the trust, appoint trustees, and define the charitable purpose. Under Section 23 of the Inheritance Tax Act 1984, transfers to charitable trusts are completely exempt from inheritance tax with no limit. If charitable gifts reach 10% of your net estate, the remaining estate qualifies for a reduced IHT rate of 36% instead of 40%.

Emma, 55, allocates £60,000 from her £600,000 estate to a charitable trust supporting environmental causes. She names trustees and provides a Letter of Wishes suggesting five environmental charities. The £60,000 is IHT-exempt, and because it represents 10% of her estate, the remaining £540,000 is taxed at 36% instead of 40%—saving her family £21,600 while supporting causes she cares about.

Charitable trusts require proper legal drafting to meet Charities Act 2011 requirements. If annual income exceeds £5,000, trustees must register with the Charity Commission under Section 30(2) of the Charities Act 2011.

Common Questions

"Can I set up a charitable trust in my will instead of leaving money directly to charity?" Yes, you can establish a charitable trust in your will rather than making direct gifts. This gives trustees flexibility to support multiple charities through a Letter of Wishes you can update without amending your will. All charitable gifts remain inheritance tax-free.

"What's the difference between a charitable trust and a charitable legacy in a will?" A charitable legacy is a direct gift to a named charity in your will. A charitable trust gives trustees ongoing control over which charities benefit and when. Trusts offer more flexibility but require trustees to manage them, while direct legacies are simpler to administer.

"Do charitable trusts in wills still qualify for inheritance tax relief?" Yes, charitable trusts receive the same inheritance tax exemption as direct gifts—transfers to qualifying charities are completely IHT-exempt with no limit. If charitable gifts total 10% or more of your net estate, the remaining estate qualifies for a reduced 36% IHT rate instead of 40%.

Common Misconceptions

Myth: Charitable trusts are only for wealthy people leaving millions to charity.

Reality: Charitable trusts can be established with any amount, from a few thousand pounds upward. They're particularly useful for supporting multiple charities or crossing the 10% IHT threshold—for example, leaving £50,000 from a £500,000 estate achieves the reduced 36% tax rate on the remainder.

Myth: Once you create a charitable trust in your will, you can't change which charities benefit.

Reality: Charitable trusts use a Letter of Wishes you can update anytime without changing your will. While the charitable purpose in the will must remain constant (such as "education charities"), the specific charities in your Letter of Wishes can change as circumstances evolve.

  • Charitable Legacy: A direct gift to a named charity in a will, simpler than a charitable trust but offering less flexibility over which specific charities benefit.
  • Charitable Remainder Trust: An advanced form of charitable trust where beneficiaries receive income during their lifetime before the remainder passes to charity.
  • Trust: The broader legal structure that charitable trusts belong to, though charitable trusts have special legal status and tax benefits not available to other trust types.
  • Inheritance Tax: The tax that charitable trusts help reduce through complete exemption on charitable gifts and potential reduced 36% rate on remaining estate.
  • Tax Benefits: The financial advantages charitable trusts provide, including IHT exemption and reduced tax rates that make philanthropy more affordable for your estate.

Need Help with Your Will?

Understanding charitable trusts helps you structure giving that benefits causes you care about while providing inheritance tax advantages. Proper planning ensures your charitable wishes are honoured.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.