What It Means for Charities and Legacy Giving

The Autumn Budget has brought some big changes to the UK’s tax system, particularly in the areas of inheritance tax, capital gains tax, and pensions—all likely to have an impact on legacy giving. With charitable legacy giving exceeding £4bn in 2023/24, these changes and their possible affects are certainly worth reviewing.

Inheritance Tax

Despite a mooted change, the budget did not alter the ‘nil rate band’ for inheritance tax (IHT) [1], but instead has frozen the tax threshold until at least 2030. While this isn’t quite the same as cutting it, inflation (particularly for house prices) will mean that more estates will be pushed into the taxable band over time—a concept know as ‘fiscal drag’.

Estates leaving a charitable gift also continue to benefit from tax relief: gifts to registered charities exempt from IHT, and estates leaving at least 10% of their taxable value to charity receive a reduced tax rate on the remainder. As inflation pulls more estates above the tax threshold, these individuals may well to consider charitable gifts in their legacies to take advantage of the relief.

Unfortunately, on the other hand some may choose to re-plan their giving to offset the tax bill and protect their inheritors’ wealth. For those writing a will for the first time, there might also be hesitancy about making a charitable gift due to the tax burden.

Capital Gains Tax

Another relevant change introduced in the Autumn Budget is the raising of capital gains tax (CGT) rates, placing a higher tax on investments and property.

While higher CGT rates might discourage some people from selling assets, meaning a higher share of investments and property passed on as part of estates over the longer-term, a more immediate outcome of this change will be the lower value of estate residues made up of property and investments. The higher tax rates will particularly affect second homes, meaning larger estates—and their gifts—will bear the brunt of this.

Executors will also have to consider the impact of higher CGT when dealing with asset-based legacies, especially when those assets are sold to make up a charitable bequest. While tax relief on CGT for assets gifted directly to charity remain the same, the increased rate might affect how executors approach the timing and structure of these gifts.

Pensions

The announced change that pensions will no longer be exempt from inheritance tax from April 2027 probably has the largest implications for legacy giving. While pensions cannot be passed on via a will, defined contribution pots can be inherited by nominated beneficiaries. Previously, these could be passed on tax-free meaning individuals could choose to keep their pension assets intact for inheritance while drawing on other assets in the meantime. This is no longer the case, as pensions, in due course, will form part of a person’s estate for IHT purposes.

For some, pensions being taxable under IHT will increase the appeal of making a charitable gift as a way to reduce or remove their new-found tax liability. For wills with pledged gifts that legators had hoped would benefit from charitable tax relief, the inclusion of pensions as a taxable inheritance asset mean that these gifts may need to increase to keep their eligibility.

For others, estates with pension pots might instead downsize their charitable gifts to reduce the impact of tax on their inheritors’ wealth. From a logistical perspective, this change is also likely to add complication to the probate process somewhat as pension scheme administrators will be required to report and pay IHT on pensions.

The 29-month period between today and when this becomes live in 2027 gives a good chunk of time for potential legators to sound out the changes, and also for charities to make the case that a gift in will still makes sense. To this end, there could be an opportunity for charities to raise money through pensions gifts, but this would need donors to update their pension nomination forms to include a named charity beneficiary.

Looking forwards

The budget’s reforms mean that people are likely take a close look at their legacy plans, and charities in turn may well experience some fluctuations in their legacy income as legators and executors become familiar with the new rules and processes.

While there are substantive changes directly affecting legacy giving in this budget, other indirect factors—how wealthy people feel, and attitudes to charitable giving—are less easy to ascertain.

[1] Estates valued at over £325,000—the ‘nil rate threshold’—are subject to inheritance tax, with this threshold rising to £500,000 for primary residences and up to £1 million when this allowance has been passed to a surviving spouse.