22 September 2020
Since 2012, deceased persons' estates that bequeath 10% or more to charities benefit from a reduced IHT rate of 36%. It seems that this has contributed to a steady rise in charitable legacies. Nevertheless, 2020 is turning into a challenging year, even for this source of income.
Changing attitudes
In 2018/19, gifts to charities in deceased people’s wills amounted to £3 billion. Of this, roughly half went to the top 100 charities ranked by income, and represented 26.9% of their total voluntary income. The top two were Cancer Research UK (£185m) and the RNLI (£123m), but animal charities were also major beneficiaries. The Economist newspaper reckons that charitable bequests buy six out of ten lifeboats, train two out of three guide dogs and support half of all rescued cats.
While the introduction of the reduced rate of Inheritance Tax (36% instead of 40% on estates that leave 10% to charities) has been responsible for changing attitudes towards this type of giving, charities themselves have been actively encouraging it. 200 charities now work together through an organisation named ‘Remember a Charity’ to persuade people to leave a legacy. According to a survey by nfpSynergy, a research consultancy, 68% of will-writing professionals now routinely remind their clients of this option, many offering it as a means of reducing the IHT liability.
All this adds up to a measurable increase in awareness. In 2010, 12% of those drafting a will actively rejected the idea of making a bequest to charity; this had fallen to 9% by 2019. 17% of charity supporters aged 40 or over have included a charitable bequest in their will and a further 10% stated that they were prepared to do so.
The Covid paradox
However, the impact of Coronavirus is making 2020 a challenging year. According to Legacy Foresight, a firm of analysts in the legacy sector, the average value of residual bequests has fallen between 3% and 7% due to falling property values and share prices. The total reduction in legacy income could be as much as 27% due to the slower housing market and the pandemic’s effect on solicitors’, charities’ and government departments’ capacity to process bequests. Some of this is merely delayed and will be recovered in later years, and, tragic though it may be, it cannot be denied that premature deaths due to Covid will lead to some legacies being received sooner than expected. Legacy Foresight estimates that this will amount to 8,000 to 10,000 legacies over the next five years.
The increasing trend in charitable legacies seems set to continue, probably rising from £3 billion in 2019 to £3.6 billion in 2024.
Planning for the long term
Legacy income is not exclusively the preserve of the larger charities. Smaller charities should not neglect this valuable source, but obviously to obtain the greatest benefit, forward planning is necessary. Charities must ensure first of all that their donors and supporters are aware of the tax break, then encourage them to write favourable wills. Some charities actually offer will-writing services, presumably taking all necessary precautions against conflicts of interest. Many charities subscribe to the Legacy Notification Service, operated by Smee and Ford in collaboration with HM Courts and Tribunals Service. This alerts subscribers to bequests in wills for which probate has been granted*. For all charities, advance knowledge of legacies is useful as it assists budgeting and helps to maintain contact with benefactors, thereby guarding against a change of heart or family pressure to rewrite the will. All this requires an efficient system – and one that complies with the data protection laws.
Wills that include charitable bequests are those that are most likely to be challenged by relatives who consider themselves disinherited; the number of court hearings of disputed wills has increased by one third since 2012. It is quite common for disappointed beneficiaries to raise the question of Auntie Mary’s soundness of mind when she left all of her estate to the local cats’ home. Smaller charities are less likely to have the resources to deal with such disputes. For that reason, if your charity gets the opportunity to advise a donor who is considering making a bequest, it is good practice to encourage them to leave a letter of wishes explaining why they made that decision. It may also be beneficial to introduce such donors to a sympathetic tax professional, since the calculation of the minimum 10% required to reduce the inheritance tax rate to 36% is not always straightforward.
As always, we are here to give you and your charity, as well as your supporters and donors, the highest quality professional advice.
If you would like to know more about how to use this IHT exemption to boost your charity’s income, contact the charity and not for profit expert in your local UHY office.
