Proposed changes to inheritance tax could affect legacy income

Inheritance Tax (IHT) has been hitting the headlines recently, sparked by a group of Conservative MPs lobbying for its abolition. 

Jacob Rees-Mogg and Liz Truss are among 50 MPs who have written to the prime minister calling for IHT to be scrapped.

The campaign was spearheaded by former chancellor Nadhim Zahawi, who branded inheritance tax “morally wrong”.

As a result, the Conservative party is said to be considering making the scrapping of inheritance tax part of its manifesto pledge, in an attempt to shore up votes ahead of the 2025 general election.

While the proposed change is being welcomed by homeowners, charities are concerned about the effect it would have on legacy giving.  

Before we delve into the reasons why, let’s look at how charities benefit now.

The current state of play

Inheritance tax is a charge on the estate of a person that has died. An estate consists of their property, money, and possessions.

As things currently stand, people with an estate worth less than £325,000 don’t have to pay inheritance tax.

Anyone with an estate above that value is liable to pay 40% tax on the amount over the £325,000 threshold.

The current IHT framework incentivises legacy giving, as charitable gifts in wills are exempt from tax, effectively increasing the IHT allowance on supporters’ estates.

And, if someone donates more than 10% of their estate to charity, they benefit from a discounted IHT rate of 36% across the remainder of their estate.

Third sector concerns

Through its Remember A Charity campaign, the Chartered Institute of Fundraising is urging government and policymakers to consult with them to explore the impact it would have on charities.

The organisation is concerned that changes to the IHT framework could pose a risk to what has become one of the largest sources of voluntary income in the UK, raising £3.9bn annually.

Lucinda Frostick, Director of Remember A Charity said of the news, ‘Legacy giving has become a lifeline for thousands of charities and community-based organisations, building resilience and long-term income that has proved crucial in the current economic climate.”

While IHT impacts less than 4% of deaths, the impact of the gifts from those estates is considerable. They account for around one-quarter of all charitable estates and half of all legacy income donated.

Third sector response

Remember A Charity is taking the lead on a collaborative response to the Government. As Lucinda Frostick explains: ‘As a representative body for almost 200 charities that rely on legacy giving, we’ll be urging government and policymakers to consult with us, our partners, and the wider sector to explore the impact of any IHT changes on gifts in wills and ensure that legacy income will be protected.’

The organisation is working with the Chartered Institute of Fundraising and other sector bodies to build up a bank of evidence on the importance of the IHT to present to Sunak Rishi in the coming months.

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