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Posted in Ask the Experts Legacies & In Memory

How does the IHT incentive affect legacy fundraising?

Inheritance Tax (IHT) is an unpopular and complicated tax that affects a minority of estates and yet it has a huge impact on legacy fundraising. Why does it matter so much and, in light of the ongoing review of IHT, what is being done to protect the current environment for gifts in Wills?

It’s a common misconception that tax relief is simply an incentive, something that is ‘nice to have’ but – rather like that extra cushion on the sofa – has limited real value.  After all, no matter how generous a tax break is, it’s rarely the sole or even primary reason to leave a charitable legacy. 

Ultimately, people give because they care and are inspired by the cause. Because they want to leave a positive contribution on the world when they are gone. So why is it that the IHT break is so important for legacies?

Charities are increasingly reliant on legacy income

Here in the UK, we’ve come to rely on a rapidly growing legacy marketplace, worth over £3 billion each year. More charitable services are being funded through gifts in Wills and the number of supporters is on the rise.

In what remains a challenging fundraising environment and with legacies contributing 15% of all voluntary income annually, charities have never been so reliant on gifts in Wills. While legacy income is growing, the fact remains that the market is being squeezed, with more charities competing for funds amid the uncertainty of Brexit, weakening property prices and falling death rates. The sector simply cannot afford to lose any legacy giving incentive, least of all IHT relief.

How the current tax relief incentivises giving

Here in the UK, we have one of the most encouraging fiscal environments to promote legacy giving. Charitable gifts in Wills are exempt from IHT (charged at 40%) and any estates that includes donations of 10% of their value (or above) also benefit from a discounted rate of 36% across the remaining value of the estate.

This 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 (source: Behavioural Insights Team 2013). But the real issue here is that tax relief gives solicitors and financial advisers the impetus to discuss legacy giving with clients.

Although solicitors aren’t fundraisers and it’s not their job to be, they are charged with raising the issues that people need to consider when writing a Will. Talking about donations 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 just by referencing the option of leaving a gift to charity, the number of gifts can be trebled.

At Remember A Charity, we’re working hard to encourage professional advisers to talk legacies. We’ve now got to a place where seven in ten advisers say they regularly reference the tax benefits of legacy giving with clients.

Within this environment – one that normalises legacy conversations and conveys the state’s support for the concept – gifts in Wills are becoming so much more commonplace. The tax incentive is working and that’s why it’s so important that we work together to protect it.

Tax incentives at risk

The ongoing review of IHT by the Office of Tax Simplification (OTS) is an opportunity to create a more fair and simple system for the public, but it also puts the tax incentive for legacy giving in jeopardy. In fact, a recent proposal from one leading thinktank even suggested that IHT should be abolished altogether with little reference to the impact on charities.

While the first OTS report was published late last year focusing on how the administrative side could be simplified, it’s the next stage that will unveil proposals for how IHT may be structured and what this might mean for the sector.

It’s impossible to second guess what decisions will be made, but the government has long supported gifts in Wills and we are optimistic that future tax policies will continue to encourage and inspire giving. Still, we won’t rest on our laurels and it’s in every charity’s interests to remain engaged in the next phase of this review.

Working behind the scenes with fellow trade bodies and government, our focus is always to ensure that legacies – and the vital funding they brings into the sector – are protected and enhanced, never overlooked.

Rob Cope is director of Remember A Charity – the 200-strong consortium of charities working together to promote legacy giving and make gifts in Wills a social norm.

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