REDUCED RATE INHERITANCE FOR CHARITABLE DONATION
You may recall that in the last Budget the Chancellor outlined proposals to reduce the rate of inheritance for those estates making charitable bequests. Detailed proposals have now appeared on the new 36 per cent rate of inheritance tax where at least one-tenth of an estate is left to charity.
Treasury secretary Justine Greening said the idea is "the most radical reform to charitable giving for more than twenty years".
However, there are many complexities still to be ironed out. For example, it is not yet decided whether jointly held property will be included in the assets for the purpose of calculating the 10 per cent threshold.
The reduced IHT rate will, of course, apply only to the part of the estate not passing to charity. Charitable bequests themselves, which are currently outside the taxable estate, will remain so.
Also, to qualify, the bequest will have to exceed 10 per cent of the taxable estate, after deducting the nil rate band and the value of property passing tax-free to a spouse. The 4 per cent extra IHT relief will thus be limited to a small number of rather large estates.
Charitable legacies will still represent a cost to the other beneficiaries, even after taking into account the lower IHT rate. But the cost will to some extent be shared with HM Revenue & Customs. And where the testator was already planning to leave a significant legacy to charity, then the net estate left to the taxable beneficiaries can even be increased by increasing that legacy, according to law firm Withers, which specialises in giving philanthropy advice.
The proposal could be a significant boost to the charity sector. As well as reducing IHT, it will raise awareness of the tax-efficiency of charitable bequests, both among testators and among practitioners they instruct to prepare or revise their wills. "At present, only one third of advisers bring up the question of charitable giving when drafting wills", said STEP chief executive David Harvey. "We think this new policy has the potential to increase that figure to near 100 per cent."
The new tax rate, if enacted, will change the balance between lifetime giving and legacy provision to charities.
Charities will have to begin planning revisions to their fundraising literature, said Wendy Walton. They will also have to deal with the issue that testators do not usually think in terms of leaving a fixed percentage of their estate to charity. Rather, they tend to leave specific amounts to favoured charities, according to Sarah Campbell, tax director of accountants PKF.
Withers gave a guarded welcome. "Many charities face funding shortfalls now and long term measures such as this will do little to address current concerns", said Withers' Christopher Groves. But the measure "should ... in the long term increase the overall level of charitable donations", he added.
The consultation closes on 31 August. Any legislation will not come into effect until the 2012-13 tax year and will not apply to deaths before then.
