Changes in inheritance tax laws encourage charitable giving

31 May 2017

In the March 2011 Budget, the then Chancellor, George Osborne, announced a cut in the rate of inheritance tax (IHT) from 40 per cent to 36 per cent with effect from 6 April 2012 for those who left at least 10 per cent of their estate to a charity.

To give a simple example and ignoring any other exemptions and reliefs which may be available other than the nil rate band, on an estate worth £1m left entirely to your children, £730,000 would go to the beneficiaries and £270,000 to HMRC. If 10 per cent of that £1m estate above the £325,000 nil rate band is left to charity, the beneficiaries will receive £713,800, HMRC £218,700 and the charity £67,500. [As an aside, working out whether your estate qualifies is not as straightforward as this example suggests].

Government statistics indicate that there was a sharp increase in the amount of charitable donations left in wills, with tax relief granted increasing from £470m in 2011/12 to £670m in 2012/13 - ie the first year after the introduction of the change.

Since then there has been a steady increase in the amount of relief granted year on year to £730m in 2013/14, £760m in 2014/15 and £880m in 2015/16. This would suggest that this specific government policy is working and that more estates that would otherwise be liable to an IHT charge, are leaving assets to charity than was the case in previous years. However, the figures can be skewed by some very large donations in some years from certain estates and there is also a growing trend for individuals to leave money to charities on the basis that their children are already well provided for.

Whilst some might argue that the £880m ‘lost’ to the Exchequer could be spent by the government on the NHS, for example, the tax relief would certainly seem to be worthwhile for the recipient charities since a record £2.5bn was left to charities in legacies written into wills in 2016 - up £7m on 2015, although this £2.5bn was generated by only 6 per cent of the UK population. Cancer Research UK was the most popular choice of charity across the whole of the UK receiving £177m in 2016 from legacies left in wills. Sadly though, there also seems to have been an increase in family members challenging wills where the family feel they have been disadvantaged as a result of the charitable bequests.

For more information please get in touch with Karen Clark, or your usual RSM contact.