Could Abolishing IHT Reduce Legacy Giving?

In its latest benchmarking survey of 2,000-plus charity donors – more than 30% say they have either included a charitable legacy in their will or are preparing to do so. The survey also revealed that the economic climate has not deterred most from saying they would leave a legacy; in fact, double the number of people indicated they were more likely to leave a charitable legacy.

Brits are, it appears, a charitable people – but to what extent is this influenced by the potential inheritance tax savings to be made in leaving legacies to charity?

Under the existing rules, charitable legacies are exempt from IHT; and if more than 10% of an estate is left to charity – the IHT rate applied to the rest of the taxable estate drops to 36%.

In reality, only a tiny proportion of estates – fewer than 4% - are currently affected by IHT; and while IHT revenues for the treasury are small (a relatively meagre £7m, according to the Institute of Fiscal Studies) – the amount charities receive in legacy income from estates every year is significant. According to Legacy Foresight, more than £3.85 billion in legacy income in the UK was reached last year – a figure it suggests could reach £5bn by 2030 if IHT remains in place.

Death of IHT

But there are concerns following calls for IHT to be abolished. More than 50 MPs have urged government to scrap IHT and recent reports suggest the prime minister is actively considering it ahead of the 2024 general election.

If it were to be abolished, the tax incentives to leave charitable legacies would, of course, dissipate; yet the loss of financial benefit to the treasury would be small. Responding to reports that IHT could be scrapped prompted Lucinda Frostick, director of Remember A Charity, to say: ‘Any change to inheritance tax that fails to consider the likely impact on legacy giving and just how vital this income stream is for UK charities would be of great concern.’

But could the loss of tax incentives to prompt charitable legacies mean testators will be less charitable when making their wills?

There will undoubtedly be some will-makers who might be less willing to leave a charitable legacy if IHT is abolished. Yet wealthier will-makers, knowing their estate will not be charged IHT, may prove more prepared to be more generous towards charities (after all, there will be more cash available).

And bear in mind that the IFS says the wealthiest 1% would reap half the benefit of scrapping IHT (an average £1m tax cut). Further, around 90% of estates which are not currently paying IHT would not be directly affected by IHT being abolished in any case.

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