From this month, more wealth can be transferred free of inheritance tax. Under changes announced by George Osborne in 2015, an additional tax-free allowance for domestic residences passed to direct dependants will increase the tax-free amount from £650,000 for a couple (in stages) to £1m by 2020.
Changes to IHT have implications for people who choose to leave money to charity. Charitable bequests are currently free of tax. Our research shows that this really does encourage people to leave money to charity: when someone’s wealth is just above the current IHT threshold, they are more than twice as likely to donate as when their wealth is just below it.
There is a risk, therefore, that raising the threshold could reduce the number of charitable estates. In the worst-case scenario, our estimates indicate that about 1,200 fewer people each year would leave legacies. This would be the case if the effect was for all 15,000 estates valued above the current limit, but below the new limit.
More plausibly, the effect might be concentrated among people whose wealth is somewhere around the threshold. Solicitors say that the threshold is a "focal point" for discussing how a charitable bequest can be used to avoid any tax liability. However, because about 1,000 fewer people are close to the new £1m limit than to the current £650,000 limit, this would also mean fewer charitable bequests.
In practice, the new higher limit is for people who leave domestic residences to their direct dependants. Those with children are less likely to leave money to charity than the childless, and they tend to be less responsive to the type of incentives provided by the tax threshold.
In other words, the people whose estates will now be exempt from IHT because of the new allowance are not so sensitive to tax considerations when donating to charity. This should reduce the risk to charities’ legacy income, at least in the short term. There is also the argument that this might lead to some new donors: those who now expect not to have to pay IHT and feel they can afford to leave gifts in their wills. But, again, this relies on those individuals knowing that they have the option of including charities and whether they are reminded of this while preparing their wills.
Our research shows that solicitors have an important role to play during the will-making process in reminding people about the option of donating to good causes. We provide striking evidence that solicitors’ references to charity can have a powerful effect on the number of bequests. We also show that both solicitors and clients find it an appropriate topic of conversation.
This week’s changes provide a timely reminder to the sector to think about how it can protect and grow legacy income. We hope too that solicitors will think about the range of ways that they can include charities in the conversation. And, as Remember A Charity stated a few weeks ago, this makes it all the more important that the existing range of incentives that encourage legacy giving are reviewed.
Sarah Smith is professor of economics at the University of Bristol