5 April 2018
The Inheritance Tax incentive should not be ignored.
Large charities take the lion’s share
In 2016/17 the total income from all sources in the UK’s charitable sector was £75.3 billion, an increase from £71.1 billion in the previous year. Whilst this represents growth of 5.7%, it is in fact the first year in the last five when the rate of growth has increased, and only by 0.1 percentage points. These statistics have been produced by Charity Financials.
There are 167,306 registered charities, of which 13,831 reported no income in 2016/17. As always there is a huge gulf between the small group of very large charities and the huge number of small ones. 370 charities each reported total income in excess of £30m. These include Save the Children, Cancer Research UK, and the National Trust. The top 1,247 organisations, each with an income exceeding £10m recorded an aggregate on £62.6m, whereas the smallest 134,852 charities’ aggregate income was less than one tenth of that amount.
Of the total amount of income raised by charities 52% is by voluntary donations. The most successful charity in this regard is Cancer Research UK, which received £463.4m from its fundraising activities, followed by the British Heart Foundation (£278m). Other significant sources were trading income: 20% and legacies: 25%.
Small charities under pressure
The other significant difference between the few very large charities and the vast number of small ones is in the amount of surplus they generate. Those charities with income exceeding £10m reported an aggregate surplus of £1.7 billion last year. All the other charities generated less surplus income than in the previous financial year. And those charities whose annual income fell below £250,000 were, as a group, in deficit.
This shows that many of the smallest organisations are spending more than they are earning. In fact the Charity Financials report states that many small charities are on a knife-edge, struggling to keep their organisations afloat.
A challenging time
In spite of year-on-year growth in charitable giving, most charities are currently experiencing challenges. Reducing government budgets, both nationally and locally continue to have an impact on income streams, and increasing restrictive legislation is making compliance more onerous. The imminent introduction of the new General Data Protection Regulations has created a great deal of work and expense for charities with databases of donors, and on top of all this there is the distraction of the Oxfam-Haiti revelations which might well reduce the appetite of the general public for charitable giving.
Bequests
There is, however, some good news. Government statistics show that funds bequeathed to charities in deceased persons’ wills has been rising steadily since the introduction of the reduced 36% Inheritance Tax rate on estates with charitable legacies of 10% or more. In 2016 £2.5 billion was left to charities, up 7% on the previous year. For reasons that require no explanation Cancer Research UK was the largest recipient of bequests, generating £177m from this source.
Planning for the long term
Obviously, with the possible exception of those that carry out research into terminal illnesses, charities that wish to encourage this type of giving need to be planning for the long-term. They must ensure first of all that their regular donors and supporters are aware of the tax break, then encourage them to write favourable wills. Subsequently they must continue to keep in touch with each benefactors to guard against a change of heart or family pressure to rewrite the will. All this will require a very efficient system – and one that complies with the data protection laws.
The larger charities have always been very protective of their rights to receive bequests. Experience has shown that these are the wills that are most likely to be challenged by relatives who consider themselves disinherited. It is quite common for thwarted beneficiaries to raise the question of Auntie Mary’s soundness of mind when she left half of her estate to the local donkey sanctuary. Smaller charities are unlikely to have the resources or tenacity to deal with such disputes. For that reason, if your charity gets the opportunity to advise a donor who is considering making a legacy, it is good practice to encourage them to leave a letter of wishes explaining why they made that decision. It might also be beneficial to introduce such donors to a sympathetic tax professional, since the calculation of the minimum ten percent 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 me or your local UHY charity adviser. Alternatively, if you would like to read more charity focused blogs please click here.
