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Inheritance tax relief 'will discourage legacies of over 10 per cent'

Fundraising | Tania Mason | 23 Jun 2011

The new 10 per cent Inheritance Tax (IHT) Charity Relief announced by the Chancellor in the March Budget could actually encourage legators to reduce the amounts they had planned to leave to charity, an audience of lawyers and philanthropy advisers heard yesterday.

The intricacies of the new relief was explained to delegates by Richard Kent from HMRC and Mark Herbert QC from law firm Five Stone Buildings, at a conference called Stimulating Philanthropy organised by Step, the Society of Trust and Estate Practitioners.

Kent explained that a charitable gift of exactly 10 per cent of the whole estate was the most cost-efficient percentage to bequeath under the new relief, as this would leave the same amount for other beneficiaries of the will as a legacy of 4 per cent.

However, if the charitable legacy rises above 10 per cent, the proportion remaining for other recipients falls rapidly and the cost per pound of the charitable legacy rises accordingly, making it less cost-efficient.

Mark Herbert said: “I mentioned this new provision to somebody in my chambers and he said he would instantly reduce his charitable giving in his will to 10 per cent.  I thought he was joking until I saw Richard Kent’s figures just now, showing that the value of this relief goes down as soon as you start straying above 10 per cent.  So in a way, I think this relief is just a gimmick.”

Herbert said the consultation paper on the new relief states that there were 552,000 deaths in 2010/11 and of those, 16,000 (3 per cent) will pay inheritance tax.  He said that if 10 per cent of those were persuaded to leave a charitable legacy, that would be 1,600 new legacies in a year.  

“So I don’t think it’s quite so important as some might imagine,” he said. “It’s political, it strikes me as being part of the Big Society in the sense of providing a tax incentive for the private sector to shoulder somewhat more of the financial burden that would otherwise be expenditure of the state.”

Increasing legacies to 10 per cent

But Richard Kent took a more positive view of the value of the relief, stating that it should also encourage people to increase their legacy gifts to the 10 per cent optimum.

He said: “This incentive should provide a very strong message for people who are thinking of leaving any amount to charity in their will to give serious consideration to increasing whatever they were thinking of giving, to 10 per cent.”

Kent also said that in some cases if the will’s other beneficiaries were minded to boost the charitable bequest to 10 per cent they may end up with more money in their own pockets as well as increasing the gift to charity.  “Government recognises and is content with that result,” he added.

He accepted that often legators don’t know exactly how much their estate will be worth and what reliefs will be available to them; “therefore if this is going to work it is going to require some standard formulaic clause that can be inserted into wills to be sure that estates can benefit from the reduced rate”.

He warned that the timescale for getting the detail hammered out and the relief written in to legislation so that it is enacted for deaths that occur on or after 6 April next year, as the government envisages, is very tight, and so he urged everyone to respond to the consultation on the proposal as soon as possible.

Philip Spedding, senior manager at Arts & Business, doubted the relief would have much impact on overall legacy giving. “There’s nothing in this about strengthening the relationship between the donor and the charity. So it might change how some people give but it won’t encourage new people to give from scratch.”

He suggested that if charities are to make the most of the IHT relief they should work together to promote it to the giving public, but he didn’t hold out much hope of that happening. “Charities tend to be very insular,” he said.

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Directory: HM Revenue & Customs (HMRC)