There is a growing impetus for the introduction of a lifetime legacies policy in the UK. Simon Weil examines the means by which such a policy might be implemented. This article was first published in the STEP Journal in 2011.
Lifetime legacies, taking the form of the charitable remainder trust (CRT) and its mirror image, the charitable lead trust (CLT), have long featured in the toolkit of philanthropic tax-planners in the USA. Essentially, the CRT provides an income stream to the donor but at the same time identifies a charity as the capital beneficiary (of the asset generating income stream for the donor during the donor’s lifetime) upon the death of the donor. Conversely, the CLT allocates the income generated by the relevant asset or assets to the chosen charity during the donor’s lifetime, the asset or assets passing to nominated, non-exempt beneficiaries on the donor’s death.
Lifetime legacies were developed by fund-raisers in California, working for universities. Eventually the IRS accepted their value as a fund-raising tool for the development of endowments and capital projects, scholarships etc. and, subject to their being regulated, accepted the concept. Indeed, forms are available for would-be donors on the IRS website. Often donors are provided with a fixed return in the case of a CRT, with the result that, if the fixed return is exceeded, the charity may keep the surplus income generated. The election of the Coalition Government in the UK in May 2010 led many to believe that the prospects for the introduction of a form of lifetime legacy in the UK had never been brighter, not least because the government would be looking for ways to compensate for the cuts and tax increases that would inevitably have a significant, negative impact on the charitable sector. To date, they have been disappointed but, of the two, the CRT is felt to be the most likely to appeal to the Treasury and HMRC in due course. In the USA the creation of the CRT is exempt from the equivalents of inheritance tax and capital gains tax; the capital value of the asset gifted (discounted to the extent of the income reservation in favour of the donor) can be offset against the income of the donor for income tax purposes but otherwise the donor pays income tax on the income they receive. Due to the fact that any capital gains pass to the recipient charity, any realized gains are exempt from capital gains tax.
The basic structure of the CRT is well capable of being imported to the UK since it is essentially a form of interest in possession settlement or life interest trust. The key to its introduction is the lifting of the gifts with reservation rules in such a way as to confer the same exemptions and reliefs in the UK as are available for these vehicles in the USA. One of the main obstacles comprises HMRC’s concerns about abuse. In addition, there is concern about valuation of assets.
In the context of the Coalition Government’s Big Society agenda, 300 charities in the UK were canvassed about the introduction of the CRT. Two thirds of the charities canvassed believed that they would be worse off in twelve months’ time as a result of cuts and tax increases, notably increases in VAT, and there was general enthusiasm for the introduction of the CRT.
Parallel surveys of would-be donors/philanthropists revealed a universal interest in CRTs and there is general consensus that the CRT would provide a credible and meaningful mechanism for planned giving in the UK as part of the Big Society programme. Gift Aid on its own will not be sufficient but CRTs should provide a complimentary tool-kit for giving. If HMRC is to be convinced, people of influence and key decision-makers must be enlisted to the cause as their support could make all the difference Indeed, this process has already begun, its latest manifestation taking the form of the Philanthropy Review’s 'A Call to Action' published in June 2011.
The statistics contained in 'A Call to Action' are compelling: 'Those who have more should be able to make substantial taxeffective gifts of assets and cash to charity during their lifetime. Donors and their families should have the opportunity to give at levels that can transform a charity’s operations and to enjoy the impact of their giving during their lifetimes.
- In the USA, charities benefit from $2.5 billion in income and $4.5 billion in assets each year through living legacies;
- Charitable remainder trusts offer a tax-effective mechanism for donors to make substantial irrevocable gifts of cash or assets in their lifetime;
- The donor and the charity receive an income from these assets during the donor’s lifetime and the gift reverts to the charity on the donor’s death.
The Government should review the opportunity to open up significant gifts of cash and assets through a simple, tax-effective living legacy model such as the charitable remainder trust.'
Evidence from the USA is indeed convincing. In the past, however, Government reaction to evidence of this kind tended to be on the lines that what works in the USA may not work in the UK. The following observations may be valuable in providing a response to this objection:
- Legacies left by Wills are currently a key component for income/endowment in the case of many UK charities.
- In 2009 the legacy market was worth £1.89 billion. This figure represents 3% of all assets left by testators ie total value of such assets is in the region of £60 billion.
- In 2007/2008 legacy income was received by 4,200 charities.
- Over half the UK population fails to leave a Will.
- Whilst 74% of the UK population support charities, over 7% currently leave legacies to charities in their Will.
- 35% of the UK population would be 'happy to give a small amount to charity in their Will after they have looked after their family and friends.'
The most effective lifetime legacy model that is likely to commend itself to Government would be as simple and as easily understood as possible. It would also need to be user friendly. With this end in view, the following template is suggested:
- Donor establishes a trust and d would control and manage the assets of the trust.
- The trust may pay to the donor, at least annually and either for a fixed term or for the rest of the donor’s life (depending on the option selected by the donor), an annual sum equal to no more than 4% of the open market value of the assets (on a total return basis) at the end of each year during the subsistence of the trust.
- Upon the death of the donor, or, as applicable, the expiration of the term stipulated by the donor, the fund passes to the charity outright.
- The donor may specify if the fund is for general or specific charitable purposes, ie a general or a restricted fund.
- All assets that are at any stage eligible for the income tax reliefs on gifts to charity, currently available for gifts of quoted securities and land, would be eligible for Lifetime Legacies.
- Such a gift would be exempt from capital gains tax and inheritance tax.
- The value of the gift would be deductible against the donor’s income tax, discounted to the extent of the value of the return passing to the donor from the fund, based either on the donor’s life expectancy or on the fixed term, as appropriate.
- Deductibility should be applicable both for one year before the date of the gift and for one year following, ie there would be carry back and carry forward.
- The donor would be liable for income tax on returns he received from the fund.
The Government is clearly concerned about the extent of tax loss which a proposal of this kind might entail. Current projections estimate that the amount of tax that might be lost could be in the region of £40 million. However, such a loss would be proportionate, given the estimated value generated in terms of extra income for the charity sector, namely £484 million. Would this not be a small price to pay for a measure that could genuinely compensate for the losses charities are and will be sustaining as a result of the austerity programme? Indeed, it could be regarded as a sound investment to boost the charity sector, on which the Government has been increasingly relying to deliver services that would otherwise create a fiscal burden for the public sector.