Legacy issues

The Government’s attempted attack on charity tax reliefs in the 2012 March budget seemed surprisingly at odds with the general trend of governments of all political hues in recent years to encourage increased charitable giving.  In the last decade New Labour seemed intent on developing an increasingly sophisticated system of charitable tax reliefs and their programme included the introduction of income tax reliefs for gifts of quoted shares and land – some of which was modelled on the US system.

A new development in the last year has been the introduction of an unexpected additional relief – a new lower rate of inheritance tax where a testator gives 10% (or more) of their net estate to charity.  In this event, not only is this gift to charity itself free of inheritance tax (which has always been the case), but in addition a 10% discount is applied to the usual 40% rate of inheritance tax, so that the estate pays tax at an effective rate of 36%, meaning more goes to charity and less goes to the Revenue.  Although the concept sounds simple, the legal mechanics of implementing it are not and the legislation introduces a whole raft of new taxation terminology including: the “general” “settled property” and “survivorship” components, the “baseline amount” and the “option to merge components”.  New clauses are now available for inclusion in Wills, but for many, a discretionary Will may still be the most effective approach, as it allows the Executors to take into account different factors including the legal position at the time of the deceased’s death.

Lifetime legacies

So, where now for charity tax relief?  For a number of years, practitioners have been hoping that the trend of positive developments in promoting a more sophisticated set of tax reliefs would give momentum to a new initiative to incentivise lifetime giving as well, through the proposed introduction of Lifetime Legacies – a form of split interest trust, much used in the United States since the late 1960s. The US rules allow a donor to make an irrevocable gift to a charity during their lifetime, of shares, property or cash, while retaining the benefit of the income or use of the gift for the rest of their life –  in the US this is referred to as a “charitable remainder trust”. The donor can make deductions against income and capital gains tax at the time of the gift and its value is not counted as part of their estate for the purposes of US estate tax.

This means the charity receives a clear and irrevocable commitment from the donor (which does not apply in the case of legacies, as a Will can be changed at any time) and the charity can also acknowledge the future gift at the time it is made, giving the donor recognition and involvement during their lifetime.  At a time when pension provision is looking increasingly insecure, there could be a further advantage to lifetime legacies as an alternative to outright giving during lifetime, as this will allow donors to protect their future financial needs for the rest of their own lives, through a retained interest or income, while still making an irrevocable commitment to charity.

The government has not yet indicated that it is in favour of the introduction of lifetime legacies, and unfortunately progress appears to have stalled at present, with one cabinet member citing lack of evidence that it would successfully increase charitable giving.  The recent press coverage on perceived abuse of charity tax reliefs will not have helped the case for reform either. However, mounting support for the campaign from major charities and professionals will hopefully mean that it won’t be too long before there are more comprehensive options for charitable giving.

It is hoped that the Government’s attempt to limit charity tax reliefs in March 2012 was just an aberration and that the trend towards allowing charities to help address the social results of the economic mire will resume.

David Goepel, Head of Charities & Non-profit

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