In the Budget in March 2011, the Chancellor announced a package of reforms which the government has since described as ‘the most radical and generous reforms to charitable giving for more than twenty years’. This is aimed at ‘encouraging charitable giving and building a more socially conscious society’. Will the reality match the rhetoric?

Incentivising charitable legacy giving

The Chancellor announced a ‘major change to our inheritance tax system’, namely that for deaths from 6 April 2012, the inheritance tax rate would be reduced by 10% for estates in which at least 10% of the net estate is left to charity. A consultation on this proposal (‘A new incentive for charitable giving’) has now been launched, giving further information on how the relief is intended to operate, but also highlighting a number of potential difficulties to be addressed. Not least among these is the problem of how to be sure that the magic 10% amount can be identified for all estates, no matter their complexity. This is by no means straightforward and, at first sight, the proposal looks to run counter to the government’s parallel aim of simplifying the tax system.

On the plus side, the consultation recommends that, if the 10% margin has not been reached, the relief can still be obtained through an instrument of variation of an estate, thereby hopefully encouraging charitable giving among the non-charity beneficiaries of an estate.

Potentially the biggest incentive arising from the proposal is not mentioned in the consultation. An effect of the proposal is that a testator who was minded to leave 4% of their net estate to charity could increase this to 10% at no extra cost to the non-charity beneficiaries of the estate. Likewise, the non-charity beneficiaries of an estate leaving 4% of the net estate to charity, could increase this to 10% without diminishing their share (save for the expense of the instrument of variation).

The question remains, however, whether the proposal will lead to new revenue for charities. Any such revenue can be expected to be slow in coming, depending as it must upon the successful administration of estates of those who will have made or changed their wills in light of the proposal (or the estates being varied to trigger the relief). The government estimates that additional revenue for charities could reach £175m by 2015-16, but this seems optimistic. With only 3% of estates paying IHT, any cultural shift in attitudes to giving is, by definition, limited and there is a risk that the overall administrative cost may outweigh any gain for charity. The consultation is open until 31 August.

Gift aid reforms

A package of gift aid reforms was also announced.

A reform which is already in train (in the Finance (No 3) Bill) is the increase, from £500 to £2,500, in the overall cap on the value of benefit which a donor can receive in consequence of making a gift under gift aid. This will allow charities a little more leeway to thank donors making larger gifts under gift aid.

From April 2013, it is proposed that charities will be able to claim ‘gift aid style’ repayments on up to £5,000 worth of small donations (of £10 or less) per year, without needing gift aid declarations. However, the small print, designed to prevent abuse, means that the repayment would only be available for charities which have been registered for gift aid and operated it successfully for three years with a ‘good’ compliance record. Some smaller charities may consider the administrative cost of doing this is not worth the potential benefit of the new repayments.

It is hoped, however, that the cost of gift aid administration will be eased with the introduction, due in 2012-13, of a new online system for registering for gift aid and making claims. HMRC is consulting with the sector to develop this system.

Tainted charity donations

The Finance (No 3) Bill introduces new rules to replace the unpopular substantial donors regime, which was considered to be poorly targeted and administratively burdensome for charities.

The new tainted charity donations (TCD) rules seek to address the situation where a supposed ‘donor’ purports to make a gift to charity, upon which he can claim tax relief, but, rather than a philanthropic motive, the ‘gift’ is part of an arrangement by which the donor aims to obtain a financial advantage from the charity for himself or for someone connected to him. Where 3 conditions are met under the TCD rules, the donation is ‘tainted’ and, as a result, the tax relief on the donation is denied, but an innocent charity beneficiary of such donation is unaffected. It will be for donors, not charities, to self-assess under the new rules.

The TCD rules are complicated, but guidance is due to be devised with a working group sitting under auspices of the Charity Tax Forum. The working group can also consider any unintended consequences to be addressed.

Gifts of art and heritage objects

Following a Budget announcement, a further consultation has just been launched on a proposal designed to encourage donations of pre-eminent objects and works of art to the nation. The proposed scheme would be run in tandem with the current IHT acceptance in lieu scheme and be subject to an overall annual limit (of £20m) on the total of tax reductions which may be permitted. In essence, where a gift of a pre-eminent object was accepted under the new scheme, the donor would have their income tax and capital gains tax liability reduced by an amount equivalent to a percentage (25% is proposed) of the agreed valuation of the object. The gift would be made to the nation, rather than a specific charity, and the Government would loan the object to a suitable institution to be put on public display. The consultation runs until 21 September.

Still to come?

It remains unclear whether implementation of tax relief for lifetime legacies may be on the cards. This is a concept long established in the US tax system, for which there is rumoured to be support, but this is absent from the Government’s Giving White Paper and the Budget. Is the package of reforms announced in the Budget only the start or is that all there is?

Conclusion

The reforms package has much to commend it but, on closer analysis, it boils down to overdue (but nonetheless welcome) repairs to bits of legislation and processes which were not working well, together with some limited tweaking around the edges. We are already beginning to see that the introduction of some of the proposals stands to add unwanted complexity to an already byzantine tax system for expected benefits which may not materialise.

It is good news that there is clearly good will towards the sector and genuine good intention to make a positive difference. In the current climate, smaller, quicker wins are probably the most the sector can hope for, and perhaps such small steps will yet prove effective in nudging society towards a more giving culture. But if the government wants its reforms to be seen as ‘radical’ and ‘generous’, on a par with the introduction of gift aid, it will need to do more.