Give Generously – Charitable Giving And Tax Incentives

Tony Granger highlights tax-efficient giving, bequests and legacy funding for charitable organisations.

There are many thousands of charities competing for money from a large pool of funding. Some charities are ‘brand names’ and do much better at attracting charitable money than others, who may require marketing skills to make themselves better known. There are a number of tax incentives available to encourage the donor to contribute.

The voluntary sector receives some £2 billion each year in the UK from legacy and bequest funding.  For every £6-£7 in lifetime donations, there is £1 in death bequests to charities. Lifetime donations are more spontaneous and tax relief is instant, if you are a taxpayer.

UK taxpayers complete a gift aid donation form enabling the charity to claim back the tax you originally paid, at the basic income tax rate of 20%. For example, you might earn £125 and £25 tax is deducted at the basic rate of 20%, leaving you with £100, which is donated to the charity through gift aid. The charity can claim an extra £25 (i.e. the tax you paid at basic rate) to make your total donation £125. You can also benefit as a higher or additional rate taxpayer because you can claim back the difference between the higher and basic rate on the value of your donation.

All of your assets worldwide fall into your estate for inheritance tax (IHT) purposes if domiciled in the UK. After estate exemptions and deductions (including the IHT nil rate band, currently £325,000), the estate is taxable at 40%. However, where 10% or more of your estate is left to charity, then a reduced IHT rate of 36% applies. So bequests to charity can reduce IHT. The gift to charity must become the property of the charity or held in trust for charitable purposes (under IHTA 1984, s 23). Charitable covenants or gift aid payments that are (income) tax deductible are exempt from IHT.

Over 70% of eligible UK residents do not have a will. The Government will reap over £3 billion in 2014-15 in inheritance taxes from already taxed estates. Many wills are invalid, or poorly executed, or plainly out of date due to marriage, divorce, or death of a spouse. Dying without a will means your assets pass under the laws of intestacy. If you have no living beneficiary, your estate can pass to the Crown, the Duchy of Lancaster (the Queen) or the Duchy of Cornwall (Prince Charles).  

Alternatively, you could have a will, and pay no IHT by leaving your assets to charity! Having a will ensures clarity and direction in respect of where your assets will go. Nothing is left to chance and you can alter it at any time whilst alive if you have the capacity to do so. Many people are not married but cohabit with a partner. Dying without a will could mean that nothing goes to that partner. Wills therefore reduce the incidence of litigation, and enable you to protect those you wish to benefit. You can also support philanthropic and charitable causes.

These are best as part of a wills campaign (e.g. ‘update your will’). Successful modelling includes teaching donors to make a will in order to make a charitable bequest, and then to make an absolute bequest (conditional bequests depending on some future event that may not materialise) to the charity. The larger the estate, the greater may be the bequest amount. 50% of estates of £3 million and over contained a bequest and the average number of bequests increased from 2-5. Married people give less at death to charity (7%) than those who are widowed (25%) or single (43%). Overall, 6% of deaths in the UK resulted in a charitable bequest.

Charities need to formulate a marketing plan to get more legacy and bequest business. Forge links with solicitors and financial advisers to promote the charity. Using a targeted approach with regard to marital status and size of estate coupled with tax incentives is a powerful message tool. Individuals should update their wills on a regular basis and consider charitable bequests.