WELL, WHO WOULD have thought it? The Chancellor comes along and wants to reduce the rate of inheritance tax (IHT) from 40% to 36% if you leave 10% of your estate to charity. If you give exactly a tenth of your estate to charity and your estate is liable to IHT, the relief is worth 76%.
The CIoT thoroughly agrees with the principle of what the Chancellor wants to do. Indeed anything that encourages testators to be generous to charities is to be welcomed, particularly in these difficult times.
However, we at the CIot thought the whole point of the consultation process was to let those who deal practically with areas of taxation have an input on what is workable before we get to the implementation stage. The consultation to which we responded did not give us the opportunity to do that – the decision had already been made.
Effectively we are asked to comment on a proposal that is complex, will often result in increased valuation and compliance costs, and yet its superficial attraction may encourage taxpayers to defer their charitable gifts until after their death.
So what are our gripes? Let us remember that a gift to charity already is 100% relievable. But the reduction in tax rate is to soften the pill for those beneficiaries (usually the children) who will get 64 per cent of what is left to them, instead of 60 per cent. On a large estate, that 4 per cent may be a significant sum.
The problems stem from how you define 10% of the estate. It is not 10% of the whole, only 10% of the taxable estate – so you take out agricultural property, business property, or property left to a spouse for example, and the nil rate band too.
Another complications of IHT is the grossing up of charitable gifts. The examples in the consultation document show some of the inevitable oddities that cannot be avoided if you take IHT as we find it today. Much will turn on valuation issues, especially if the amount given to charities is around the 10% of the estate, because this is an all or nothing relief. A small change in the value of a property could therefore have a big effect. The beneficiaries may be able to effect an Instrument of Variation to get on the right side of the line, but at what cost in professional and valuation fees?
We are also concerned that, unless you are at the 50% rate of income tax, the attraction for a taxpayer to give to charities during their lifetime diminishes if the 76% headline rate (that’s 40% on the gift itself and 4% relief on the remainder of the taxable estate) catches their eye.
Gift Aid cannot match that benefit, and with many of the elderly being asset rich (to be liable to IHT in the first place), but cash poor, keeping their lifetime charitable giving down will seem logical. Surely that is not the Government’s objective?
Much simpler, in our eyes, and in keeping with the worthy intention of simplifying the tax system, we have suggested to the Government they look at our idea, for every £9 you leave in your will to charity, there is a £1 non-repayable IHT credit. If no tax is due on the estate, then there is no repayment of the credit, and if the IHT bill is bigger than the credit, then the balance is collected in the normal way, and it reduces the tax rate from 40% to 36%.
It is easy to understand and apply, and does not need anti-avoidance rules or massive valuation and fee commitments. Government might want to put in some limits because we acknowledge that there is no minimum share of the estate to be given before the relief applies, but we think this is more likely to encourage changes in the approach to giving.
Martyn Gowar is chairman of the succession sub-committee of the Chartered Institute of Taxation
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