Charity legacies: Death to inheritance tax?

Gavin Holt, Head of Charity Estate Administration, considers the future of Inheritance Tax.  

Inheritance tax (IHT) is known for making people scratch their heads. While many of us like to think we understand the rules and calculations these days, one question still provokes confusion: how did IHT manage to become so unpopular when almost nobody has to pay it?

The least popular

HMRC's own published statistics tell us that comfortably less than 5% of UK deaths result in IHT being paid, and yet numerous polls and surveys over the years have found it to be the least popular of all the UK's taxes – and that's saying something.

It's possible people don't realise that they are unlikely to have to pay IHT. It's equally possible that they know this perfectly well, but hate the idea of it anyway, perhaps because they consider it unfair (the money's already been taxed once!).  

In 2022/2023, IHT only generated about £7.1 bn for the Treasury. I'd forgive you for considering that a dubious use of the word 'only', but, compared to income tax (£249 bn) and VAT (£160 bn) it's not a lot.

In any other context, it is a huge sum and not far off double the total charity income from legacy giving in 2022, which was £3.85 bn.  

An end to IHT?

Earlier in summer, The Telegraph launched – with the support of over 50 MPs – a campaign for the abolition of IHT.

That went quiet, but now the government are talking about actually doing it. This has, as you would expect, hit the media, but it's worth reading beyond the eye-grabbing headlines.

The government told Sky News that it was "future scoping speculation" and "requires a different kind of economic environment to the one we're operating in"', so it would be fair to say that this is far from a fait accompli.  

So, are they going to do it or not? The answer to that, of course, is that nobody knows, and that we will have to wait and see.

IHT and charities

As charities are generally exempt from IHT, some might wonder why you would be interested in this topic at all. But I know that you will be because you know the paradox, i.e. charities being exempt from IHT does not mean that charities' inheritances are undisturbed by IHT.

Without getting into the detail of it here, where the now legendary grossing up applies (and where it does my typical reaction makes me sound like I'm working the bar – single or double?), charities' inheritances are reduced by the payment of IHT.

Technicalities aside, people might generally feel more charitable if they know that their estates won't be hit with IHT. It follows that legacy income should, in theory at least, increase if IHT is abolished. There's always a 'but' though.

History tells us that what ends up on the statute book is often markedly different to the initial government announcements and the resultant media frenzy.

Do you remember when the government pledged to increase the inheritance tax threshold to £1m? A nice simple notion if ever there was one. Popular too. But what did we end up with? The residence nil rate band.

Credit where it's due: this did, in a sense, result in the threshold increasing to one million pounds, but it was also one million times more complicated than the initial concept.

Before rooting (whether quietly or publicly) for the abolition of IHT, charities would be well advised to consider what, if anything, might replace it.

If I were a betting person, and assuming I couldn’t bet on things staying as they are (often the safest bet – remember the Office of Tax Simplification review?), I might place a fiver on the abolition of IHT being accompanied by the simultaneous abolition of the tax-free uplift on death for capital gains tax.

If appropriating assets to charities before sale is important now – and it is – then I'm not sure there is a word in our language to adequately describe how important it would be in that regime!

How do other countries approach IHT?  

Finally, at times like this, it's never a bad idea to think about what other countries do. Let's take a brief look at our closest neighbours in the Republic of Ireland. They have the Capital Acquisition Tax (CAT) and they are not alone. It's a common form of tax in Europe and beyond.

In simple terms, (and I should declare here that I am no expert in Irish tax law), the big difference between IHT and CAT is that, with CAT, the beneficiaries are taxed on what they receive (whether in lifetime or on death).

Besides a difficult transition, there's no reason an Irish-style system couldn’t work here in the UK, but that wouldn’t really be abolishing IHT would it? Certainly not in the eyes of the general public anyway. To end on one of those simple notions, what would be the point?

Oh, and yes … charities are exempt from CAT!

Get in touch

The team at Foot Anstey will be watching this very closely and we will, of course, continue to share our thoughts and insights with you – and we would love to hear yours.

Please get in touch if you would like to discuss anything in this article further.