IHT Gifts to Charity

What would it mean for charities if Inheritance Tax was abolished and therefore no tax incentive to leave a bequest?Chancellor Philip Hammond has requested a complete overhaul of the UKs inheritance tax framework, and the Resolution Foundation (a leading group of experts), has proposed that the tax be scrapped entirely.The government may not have such a radical change in mind for the IHT system but the public consultation period has now expired and charities have had a chance to say how they believe the future system will work.

The Resolution Foundation concept

The Resolution Foundation has proposed an interesting concept; a tax on your estate after you pass away is replaced with a ‘lifetime receipts tax’ which beneficiaries would pay as they go.  The scenario encourages people to pass on cash or assets to younger generations and potentially enable them to get on the housing ladder earlier on in their lifetimes.  This would be a lifeline to millions of young people who are currently priced out of the property market and are paying exorbitant rents to opportunist landlords.

Tax relief key role

However, what seems to have gone almost entirely under the radar is what such extensive changes would mean for legacies and charitable donations. Tax relief plays a key role in motivating the public to do social good, and is a saving to the consumer, although effectively comes at a cost to the Government. Legacy income is the largest single source of voluntary income for the sector and generates more than £3bn each year.  Thanks to the current generous system of tax relief, bequests to charity are currently exempt from IHT (otherwise charged at 40%) and a lower rate of tax (36%) is granted to any estate where 10 per cent or more is donated. The impact of this framework has had a significant effect on legacies, but in an unexpected manner.  Research proves that tax relief can be a strong incentive for people to donate, particularly for those whose Estate encroaches the IHT threshold. The real issue here though is that this potential tax relief gives solicitors and financial advisors the incentive to discuss legacy giving with clients who they are writing Wills for. Solicitors and financial advisors are not expected to be canvassing for charitable donations.  But they are expected to raise all issues that should be considered when people are writing their Wills.  Donating to charity isn’t always an obvious consideration but because of the tax relief aspect these professionals have a natural entry point for discussions with clients. And this has been an important factor in behavioural change.

Behavioural Insights Team Trials

Trials conducted by the Behavioural Insights Team show that when the option of leaving a gift to charity is referenced the number of gifts can be trebled.    Currently 7 out of 10 advisers regularly mention the tax benefits of legacy giving with their clients and without a similar tax incentive in place, such discussions are unlikely to occur. The Government has always supported the concept of legacies and we are confident that future tax policies will continue to encourage and to inspire giving.

Charities’ response

The IHT consultation led by the Office of Tax Simplification, closed last week. Charities’ response to this consultation was to highlight the importance of legacy income and IHT relief.  The Government is already in discussion with the Institute of Fundraising and the National Council for Voluntary Organisations. From a charity perspective their focus is not to determine whether IHT is the best tax model, but to ensure that charities are carefully considered within this debate.  Another proposal is to introduce VAT exemption on Will writing costs for those that include charitable bequests. As a sector, it is vital to convey the societal impact of gifts in wills, as well as the importance of tax incentives to creating an environment where conversations about charitable giving are becoming more routine.

Summary

IHT may well be in dire need of reform, but the potential impact on legacy giving must not be overlooked in its new incarnation.   It is crucial that you take professional impartial advice when considering the potential IHT implications of bequests.  Speak to us now to discuss your IHT concerns.