Preparing for Autumn Budget 2024: What changes should charity legacy teams expect to key taxes?

Charities' legacy teams will be eagerly awaiting the outcome of the Autumn Budget on 30 October, as there may be some changes to the key taxes impacting the world of legacies.

What can charities expect?

Inheritance Tax (IHT)

There is always particular interest in IHT, as it not only impacts legacy administration, but also legacy fundraising, as helping potential donors to understand the charity exemption and the reduced rate of IHT for estates where 10% or more of the baseline is left to charity can increase legacy giving.

Whilst the last few budgets have passed without any material changes to IHT, there is a real possibility of changes this time around. It's not inevitable of course and, even if there are changes, it may be that they go out to consultation before being considered for bringing into law.

Whilst exemptions and reliefs generally may be a focus, as they are an obvious way of increasing the tax revenue, legacy teams will be pleased to know that there has been little to no indication (not even speculative) that the charity exemption is on the agenda for change. If there are to be changes, they are more likely to be around business and agricultural reliefs, and perhaps even the pensions exemption.

Changes to the rates and nil rate bands (including the residence nil rate band) are possible as well. As ever, whilst any such changes could be said not to impact charities directly, they certainly have an indirect impact. Whilst charities are (and, we are sure, will remain) exempt from IHT, they do often suffer the burden of IHT where the complex grossing up rules relating to partially exempt estates are necessary.

To use the simplest example, an increase in the rate of IHT would mean a reduction in legacy income for the sector. With future pipelines in mind, there is also the question of whether living supporters may feel less inclined to leave charitable legacies in a harsher IHT regime – which could be particularly so if the longstanding pensions exemption is limited or removed. 

Capital Gains Tax (CGT)

CGT is perhaps the most likely tax to be changed. As with IHT, there is no indication that there will be any changes to charities' exempt status. Changes to the rates are likely and there is even speculation that the tax-free uplift on death could be removed such that asset disposals during estate administration will often be at enormous gains when compared with today's system. This change was once recommended as a replacement for IHT, but the speculation now is that it could happen with IHT remaining in place as well.

The good news is that, whilst change is likely, the fundamental position that an absolute interest in a bare trust is taxed on the beneficiary is likely to remain in place. This means that the standard practice of appropriating and/or assenting assets prior to disposal in order to secure charitable exemption is likely to remain, but it will perhaps become more important than ever before due to the rates (and potentially even the gains) being that much higher. Charities may therefore need to review their policies on engaging with personal representatives (especially lay ones) to flag the mitigation opportunities. 

Income Tax

In line with the pledge to deliver a budget that will help working people, the Chancellor has of course already ruled changes to the rates of income tax. That doesn’t mean that income tax will be untouched, and we may see some changes that impact higher earners, but we do not expect that any such changes will impact the position of charities in relation to residuary legacies. The age-old process of personal representatives providing R185E tax certificates to enable charities to reclaim income tax paid at the basic rate on income during the administration of the estate will surely remain in place.

Wider changes

Legacy teams are of course concerned not only with their live legacy administration files, but also legacy fundraising pipelines looking long into the future. We therefore fully support the Civil Society Group's effort to encourage initiatives that will improve philanthropy overall. If successful, some of the additional philanthropy will inevitably come in the form of legacies. The suggested improvements to the provision of wealth advice are key to this, and could equally be applied to the will writing and estate planning industry, where there is still a lot more that could be done to promote legacy giving.