Rob Cope: Why the charity sector needs to be heard on inheritance tax reform

IHT may be in need of review, but not without considering the impact on legacy giving

Rob Cope
Rob Cope

What would it mean for charities if there were no inheritance tax and therefore no tax incentive to leave a bequest?

The UK’s inheritance tax framework is currently under review and one leading think tank, the Resolution Foundation, has proposed that the tax should be scrapped altogether. The government might not have such radical change in mind for the IHT system, but we’re now approaching the last days of the public consultation period and time is running out for charities to have a say on how the future system will work.

Of course, Resolution’s proposition is an interesting concept: that a tax on your estate after you’re gone 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.

But what seems to have gone almost entirely under the radar is what such extensive changes would mean for charities and legacy giving.

Tax relief is not just a cost to government or a saving for the consumer. It can also play a key role in motivating the public to do social good. And the fact is that such a radical change to the IHT framework could be a major threat to legacy giving.

Legacy income is the largest single source of voluntary income for the sector, generating more than £3b each year. Thanks to a generous system of tax relief, bequests to charity are currently exempt from IHT (charged at 40 per cent) and a lower rate of tax (36 per cent) is granted to any estate where 10 per cent or more is donated.

As a result, the IHT framework has had a major impact on legacies, but not always in the way that most people might expect. Yes, research shows the tax relief can be a strong incentive for people to give, particularly for those who lie just over the IHT threshold. But the real issue here is that tax relief gives solicitors and financial advisers the impetus to discuss legacy giving with clients.

Solicitors aren’t fundraisers and it’s not their job to be. But they are charged with raising the issues that people need to consider when writing wills. Donating to charity isn’t always in their comfort zone, but because there is a tax benefit solicitors have a natural entry point for discussions with clients, and this has been an important factor in driving behavioural change. 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.

We have now got to a place where seven in ten advisers regularly reference the tax benefits of legacy giving with their clients and, without a similar tax incentive in place, such discussions are less likely to occur.

Government has long supported legacies and we are confident that future tax policies will continue to encourage and inspire giving. At the same time, we can’t rest on our laurels.

The IHT consultation, led by the Office of Tax Simplification, closes on 8 June 2018. Here at Remember A Charity, our response will highlight the importance of legacy income and IHT relief, and we are already in discussion with government about it, with support from the Institute of Fundraising and the National Council for Voluntary Organisations. Our focus is not to determine whether IHT is the best tax model, but to ensure that charities are carefully considered within this debate.

We are also encouraging government to consider our proposal of introducing VAT exemption on will-writing costs for those that include charitable bequests.

As a sector, we need 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 commonplace.

IHT might be in need of some reform, but not without considering the potential impact on legacy giving. Most importantly, we need to ensure that the sector has a voice in what decisions are made next.

Rob Cope is director at Remember A Charity

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