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The devil's in the detail

22 August 2011

In March this year the Chancellor announced a number of major new initiatives affecting charities. Treasury Secretary Justine Greening described the proposals as “the most radical reform to charitable giving for more than twenty years.” She went onto suggest that the proposed changes to Inheritance Tax (IHT) legislation are just what charities in the UK need. However, on closer inspection, will this really be the case?

The proposals are designed to revive the government’s stumbling “Big Society,” partly by way of the incentive of a lower tax rate where a testator has left at least 10% of the taxable net estate to a charity. It is hoped that these proposals will result in more charitable bequests that will ultimately plug the gap left by the most deep and far reaching cuts in government funding in recent times. In turn, the government believe that charities will be able to continue to play an important role in society and to help build the Big Society. However, on closer inspection of the proposals, it seems unlikely that these changes will go far enough to make up the shortfall in funding for charities and allow them to fulfil the government’s expectations.

The Proposals

1 IHT will be charged at 36%, as opposed to 40%, on deaths on or after 6th April 2012.
2 The additional relief applies to the “net estate” and not “the estate’s value.” This means that IHT at 36% is calculated after any relief or exemptions have been applied. In order to apply the lower rate of tax, the gift to be left to a registered charity must be equal to or greater than 10% of the “net estate.”
3 The government are yet to confirm the exact details of how this relief will apply, for example, it is still unclear whether jointly held property will be included in the assets for the purpose of calculating the 10% threshold. HMRC has published a consultation paper on 10th June 2011 and it is expected that the details of the IHT relief will be confirmed by 31st August 2011.
4 HMRC has invited individuals and charities to comment on the consultation paper which is titled, “A new incentive for charitable legacies: A lower rate of Inheritance Tax when leaving 10% of an estate to charity.”

The Implications

Given that the incentive is a reduced headline rate from 40% to 36%, it is unlikely that this will result in a significant increase in bequests to charities. If the government expect this meagre 4% incentive to fill the gap in funding charities, not only are the government likely to be disappointed, but the longevity of some charities could also be in jeopardy.

Cabinet Office Minister, Francis Maude, stated recently that 75% of charitable organisations have never had any state funding. In his opinion, they are “immune” from public spending cuts. However, when this is put into context, an assessment based on the size rather than the number of these organisations, the optimistic figure of 75% is cast in a very different light. The National Council for Voluntary Organisations (NCVO) figures suggest that those organisations who do not receive state funding are relatively small; around 45% of all charities, over 70,000 are in the annual income bracket £0-£10,000. Therefore, the impact on the charitable work done by much larger charities who did receive public funding, prior to the cuts in government funding, is inevitably going to be hampered.

Not only are charities facing a shortage in funding from central government, who endeavour to address the national deficit, but as the general public have been feeling the pinch, donations from the public have also been in decline. According to a report produced by Cass Business School, donations from the public dropped by £70 million in real terms over the last year. This suggests there is little chance that charities will be in a position to help build the Big Society.

These proposals are unlikely to change the mind of a donor who is not already predisposed to leaving some form of charitable gift in their Will. An additional issue for charities is that individuals who are predisposed to leaving a donation to charity, will want to leave a legacy on death rather than during their lifetime, as it will be more tax efficient to do so. As a consequence, this is likely to lead to a delay in charities actually receiving a donation. Clearly this will not be music to charities ears as they need money now rather than later.

Furthermore, these provisions are only relevant to wealthy donors whose estate qualifies for IHT in the first place. At present, there are no incentives for those who leave an estate below the nil rate band to leave a charitable bequest.

From the perspective of a donor’s beneficiary, the incentive to tax IHT at the lower rate of 36% does not mean beneficiaries will receive more of the estate because a lower rate of tax is charged. It means that compared to the previous system, it will “cost” beneficiaries slightly less where a gift is made to a registered charity; it will not outweigh the fact that 10% of what they would otherwise have received will be given to charity. In light of this, will anyone really be impressed by the government’s proposals?