The art of giving

Are we, as a society, committed to supporting the needy and deserving? Do we regard ourselves as being socially responsible? Do we regard philanthropy as a duty rather than a choice? Heady questions '“ and clearly the government has its own views on the topic. Tax legislation may seem an unlikely tool with which to encourage charity, but nonetheless it has been at the forefront of initiatives by governments past and present to persuade those of us who 'have' to give to those individuals and causes who 'have not'.

Over the years, gifts to charity have been made more attractive to donors by associated tax breaks '“ be it income tax relief in the form of Gift Aid, exemption from capital gains tax on gifts of 'things', or exemption from inheritance tax for gifts to charity. And the charities themselves have not been forgotten, enjoying exemption from direct taxes on their income and gains and limited relief from indirect taxation (VAT) on their charitable expenditure.

It can of course be argued that much of this taxation policy is only acknowledging a moral position within society which regards it as essentially wrong that a government should swell its coffers by taxing charities and charitable activity. Taxing poverty, famine relief or other good causes is hardly a vote winner, and to some extent actually increases the financial burden on the exchequer, and so is to a degree counterproductive.

But do the reliefs for individual donors actually encourage giving? It can clearly be argued that the current reliefs encourage increased levels of giving in that donations are funded out of gross income or capital rather than net. Someone making a donation out of gross income can afford to give more than someone funding their donation out of net income.

Similarly in the case of gifts on death, the inheritance tax regime enables charitable gifts to be effectively funded out of tax-relieved funds, and therefore the donor can afford to give away more than would be the case if the charitable gifts had to be made out of the net estate after tax.

But while it is clear that there is an incentive to give more, do these reliefs actually encourage anyone to make charitable donations at all? If an individual is not predisposed to giving to charity, will the current system of reliefs change his mind? I doubt it. And certainly few if any of my clients have genuinely been swayed towards charitable giving by the available tax reliefs.

Apparently those with an annual income below £5,000 give on average almost 4.5 per cent to charity, but the proportion falls the higher the income. People earning £40,000 or more donate just over two per cent. Income donated rises again at the very rich end of the spectrum, and that level of giving is down to a relatively small number of committed philanthropists among the wealthy. So what we need is more of an incentive. Something to stir the reluctant benefactor into action, even if only because he can perceive a monetary advantage.

Enter the chancellor, and the Big Society. Or, to be more precise, the proposal announced in this year's Budget statement that from 2012/13 there will be a new relief from inheritance tax for significant charitable bequests. The detail of the scheme is currently the subject of consultation '“ the consultation document is on the HMRC website. But in essence if you gift to charity at least ten per cent of your net estate after deduction of the nil-rate band, spouse exemption and most other reliefs, then the rate of inheritance tax applied to your taxable estate will be reduced from 40 per cent to 36 per cent. Sounds good in theory, but how will it work in practice?

Well, on the basis of what we know so far, and using figures gleaned from the HMRC consultation document, if you leave an estate of £850,000 and you bequeath £52,500 to charity, then under the current rules the IHT on your estate would be £189,000 and your residuary beneficiaries, most probably your children, would receive £608,500. If you don't die until after 5 April 2012, then under the new scheme your IHT bill will fall to £170,100 and your children would receive £627,000.

The example used in the HMRC consultation document suggests that under the new scheme for every £100 you give to charity the IHT bill reduces by £76, so that the actual cost to your heirs of your £100 legacy to the Cats and Dogs Home would be just £24. I am no mathematician, but I have a feeling those figures only work in the exact example quoted. But the principle's right. So, is this the key to our treasure chests; are we all now rushing to change our wills to insert or increase our charitable gifts?

If I'm honest, I haven't been knocked over in the rush. OK, its early days and we don't know all the detail yet, but the principle is fairly clear. And actually I'm quite glad of a little thinking time before the rush (if it happens). Getting my head around a formula which achieves the required level of bequest and copes with Benham etc. will I fear require the use of numerous towels and appropriate amber lubrication.

But remember '“ you only get to benefit from this relief if you give away ten per cent of your net (after reliefs etc.) estate. So we are not concerned here with £500 for the Lifeboats or £1,000 for Help the Aged. This relief is targeted at rather more substantial donations. Ten per cent of your net taxable estate. In the example used in the HMRC consultation document, the gift of £52,500 to charity still ends up costing the children £12,600. But that is a substantial improvement on the current position where the donation would cost the children £31,500.

Will it work?

The proposals may, however, induce more advisers to bring up the question of charitable giving with clients. And increased client awareness should increase charitable giving.

That's the theory anyway, although I believe this new relief will encourage increased giving by those already predisposed to charity, and in particular it may result in significantly raised levels of giving by the wealthy. But I am not convinced it is going to do much to sway the thinking of so-called middle England. They will still remember the Lifeboats, the birds and the cats and dogs. But my fear is that the new relief may not provide sufficient incentive for them to divert significant funds away from their children or other intended non-charitable heirs. And in these uncertain times who can blame them?

And how does it look from the charities' perspective? I would have thought they would be keener to encourage lifetime giving where they have the opportunity to use Gift Aid to substantially enhance the value of donations. A legacy of £52,500 to a charity is worth just that and nothing more. Make a lifetime gift under Gift Aid of that amount and the charity ends up with £65,625, but the gift only costs a 40 per cent income taxpayer £39,375. Less for a 50 per cent payer.

Please don't misunderstand my thinking here; I am not opposed to this new relief. Anything which encourages acknowledge-ment of our wider responsibilities as human beings is laudable. And I am sure we will see increased giving by some as a result. But, in terms of encouraging us all to join the Big Society and divert substantial sums to good causes, I am not yet convinced this is a potential winner.

And, actually, is that so surprising? I tend to the view that tax as an instrument of social change, which was one of those theories widely propounded in the seventies and eighties but actually rarely very well explained, is by and large a bit of a failure. Either there simply isn't and never has been the political will to use it in a sufficiently aggressive way to actually achieve significant change, or it simply doesn't work. I am not keen on any suggestion that either the current or any future chancellor should revisit Denis Healy's 'pip-squeaking' tax regime '“ it didn't work then and I doubt that it would work in the future.

Education and example

So, if not through taxation, how do we encourage charity? It may seem rather trite and comfortable, but actually I believe the best means is through education. Awareness is a great motivator. Example is even better. You only have to look at the sums raised by television-based appeals such as Comic Relief. Awareness and education by example. Leni Henry being seen to do his bit for disadvantaged children in Africa will always achieve far more than any tax relief.

Incidentally, no one seems to have come up with a wizzy name for this relief. I recall a headline around the time of the budget proclaiming 'ten for ten', but somehow I don't see that making it to the statute book. Suggestions welcome on a good old-fashioned postcard please '“ to the chancellor!

A final thought '“ legacy income for the major charities is around £1bn per annum. Money raised for 'good causes' through the National Lottery raises about £1.5bn per annum. Probably best not to ponder too long on what that says about us as individuals. Happy giving!