Better way to incentivise charitable legacies

by Anne Davis on 08.09.2011 10:16

In response to the recent HMRC consultation on A new incentive for charitable legacies, the ICAEW has suggested a way to encourage people to leave a bigger proportion of their estates to charity. We believe this would work better than the proposals in the consultation and would be more likely to achieve the government’s objective of increasing charitable legacies. 

Under the ICAEW’s proposal, instead of a reduced, ie 36%, IHT rate on the value of the net estate, IHT would continue to be chargeable at the standard rate of 40% but then would be reduced by a tax credit equal to 10% of the proposed reduced rate, ie 3.6%, applied to the chargeable estate before deducting the charitable legacy.  In terms of the effective rate of tax, this would be more progressive than the condoc proposals and thereby provide a greater incentive to make charitable legacies of more than the minimum required to qualify.

The ICAEW' s response includes tables and a graph comparing the two methods and a description of the methodology.  The figures demonstrate that for charitable legacies of more than 10%, the proposed  tax credit route costs the beneficiaries less than the reduced IHT route. 

For the purpose of this relief, such charitable legacies should be expressed in wills as pecuniary legacies, and the wills should give personal representatives the right to appropriate assets in satisfaction of the legacy.  If the wills do not possess an express power of appropriation there is a statutory power set out in s41(1) Administration of Estates Act 1925. 

The charity should be obliged to provide a receipt to the estate administrators who would forward it to HMRC, whereupon HMRC allow the relief.

Estate planning and will drafting is a long term project.  Rather than creating a regime and then tweaking it annually as happens in too many parts of the tax system, it is essential to get this right first time.

It will also be important that the rules are sufficiently straightforward to be understood by the average personal representative.  In this regard it should be borne in mind that many estates are administered by non-professionals.  The guidance will need to be written with this in mind, as well as being able to be understood by the layman in the street who has sufficient assets to come within the class of people eligible to benefit from the new regime.