View more on these topics

A charity case

Rachael Adams gauges industry reaction to the Budget move to cut the rate of inheritance tax for charitable legacies

The Budget featured initiatives to encourage philanthropy, such as increasing the Gift Aid donor benefit maximum value, but one of the biggest surprises was Chancellor George Osborne’s proposed inheritance tax relief on charitable giving.

It will reduce IHT from 40 per cent to 36 per cent for people who make a donation of 10 per cent or more to a registered charity in their wills, something Osborne wants to become “the new norm.”

The move defied industry expectations of a structural review of IHT to catch more people in the tax net. In 2009, only 12,000 estates out of 560,000 paid IHT.
Osborne’s move was a welcome result, especially in the face of negative tax changes such as the reduction of the annual allowance.

Informed Choice managing director Martin Bamford says, “It was one of the unexpected outcomes, as a lot of the Budget had been trailed. This was one of the nicer things to hear about.”

But Kleinwort Benson private client tax specialist Graeme Stenson does not think it balances out some of the less welcome tax changes. “Creating a tax break to help charities is not really going to enthral someone just brought into the higher-rate tax net,” he says. “But this was definitely a better outcome than expected.”

MacIntyre Hudson tax strategy chairman Patrick King says: “We were pleased to see no changes to the main IHT reliefs such as the nil-rate band. When the Chancellor announced this change, we got quite excited, thinking it would leave beneficiaries better off. However, our workings show that Osborne was correct in his statement that charities, rather than beneficiaries, are the target of this relief.”

The feeling among some people in financial services seems to be the 10 per cent IHT relief on charitable donations will have limited results.

Stenson says: “I suspect that charitable giving will only become the norm for larger estates. A move towards more charitable initiatives in financial planning is possible but it depends on the wider financial markets.”

Bamford believes the initiative is only likely to result in gains for those already leaving money to charity in their wills.

He says, “I do not think this will really encourage new people to donate to charity but it will make it a topic for discussion with their advisers.”

King comments: “Financial planning is normally about maximising returns and minimising tax. As this initiative does not result in more money passing to the family, it will only be relevant for those who make charitable donations but it may encourage more people to think about it.”

But independent consultant Colin Jelley sees it as a first step towards a more philanthropic Britain. “We do not have the same culture of charitable giving that exists in somewhere like the US. What we need to do more of here is encourage a whole ethos of philanthropy and giving an IHT break in this way will go some way towards that. The US has an advantage in that it offers lifetime allowance to taxpayers who donate and I think that is on the agenda for our Government.”

Bamford says: “Philanthropy is already quite a big deal in the US. We have not picked up the same kind of drive in the UK yet but incentives like this will make people more aware of charitable giving from a financial perspective.”

It is estimated that the UK’s legacy market will get an extra £1bn a year for good causes because of this Budget tax reduction.

Association of Chief Executives of Voluntary Organisations head of policy Ralph Mitchell says: “Charities have been calling for many years for the Government to incentivise people to leave money to charity in their wills. Governments around the world do it and we have not for a very long time, so it is a good move for us.”

It is not just the UK’s charities that will benefit. Jelley says: “In the past, people typically used their estate or their pension to make charitable gifts, and these dynamics are changing. What this demonstrates is the value of financial advice. It has become a bit of a cliche but change brings opportunity. I see this as an extra opportunity for financial advisers and their clients to ensure the tax structure is maximised.”
Osborne’s incentive may also raise general public awareness over IHT.

Bamford says: “Anything topical like this prompts people to have conversations with their IFA or lawyer. IHT is a relatively simple tax but a lot of people do not understand in pounds and pence the impact it has on their beneficiaries, so I think raising awareness is important. Anything that creates talking points is good news for the IFA community.”

One criticism that has been levelled at the Chancellor’s incentive is its motivation. Despite claims that he wants to make giving 10 per cent of your legacy to charity “the new norm”, many believe this is a Big Society smokescreen while the Government slashes public spending.

King says, “Charities were given a bonus of 3 per cent following the reduction in the basic-tax rate to 20 per cent in 2008/09. This is due to stop on April 5, so the new initiative could in part be seen as a way to plug this gap.”

But King does not think the Government’s motivation is relevant in this case, where the outcome will raise an estimated £350m of legacies for charities by 2016.
He says: “A negative view of the Government’s reasoning could be taken but I am inclined to think that anything that encourage the wealthy to leave more to charity is a good thing.”

Stenson says: “It is possible that it is a move to plug the welfare gap, as with the lottery funds, but if you accept the cuts are a necessary evil, then this may be no bad thing.”

Mitchell is unsure that the initiative goes far enough in its attempt to plug the gap left by slashed charity funding.

He says: “Although this announcement is good news, there are a lot of charities who are suffering significant local government cuts. These groups who rely more on public money will also need extra action from the Government to protect their incomes.”

Jelley says: “It is nothing earth-shattering. We have had IHT exemptions for charitable gifts for as long as I can remember, so it is not an oh gosh, wow policy. It is another step further down the road of supporting people to support others and that is always to be encouraged.

King concludes: “It is really anyone’s guess whether this will end up being the norm but look at Warren Buffett and Bill Gates – there does seem to be a growing move among the more wealthy to leave some of their money to charity and the new tax break certainly makes this easier.”


Close Brothers to acquire Cavanagh for £26.2m

Close Brothers is to acquire national IFA firm Cavanagh in a £26.2m deal. The move follows Close Brothers acquisition of Bristol-based Chartwell Group in September 2010 and Allenbridge Group in February 2011 and will take the total number of advisers in its subsidiary Close Asset Management to 116. The Cavanagh management team, Andrew Fay, Simon […]


Tisa’s Small says pension relief doesn’t work

Tax Incentivised Savings Association director of policy Malcolm Small says tax relief on pensions does not work and is urging policymakers to consider using an Isa structure to encourage people to save for retirement. In an interview in this month’s Retirement Strategy, Small says offering people tax relief on their contributions fails to encourage Middle […]

Base rate held at 0.5% and no more QE

The Bank of England bank rate has been held at 0.5 per cent for the 25th month in a row and quantitative easing stays at £200bn. The last rate change was on March 5, 2009, when it was reduced from 1 per cent to 0.5 per cent. On the same day, the Bank of England […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment