News analysis: Charity begins with the wealthy

The latest budget provided many talking points for both personal and business finance, from the cut in corporation tax to the 1p reduction in petrol duty and the introduction of enterprise zones – all intended to stimulate growth. But in the area of charitable giving, UK chancellor George Osborne’s budget took steps to “encourage wealthy people in our society to give more.”

The area of real interest for wealthy families is the cut to inheritance tax that comes when a donor makes a sizable charitable donation in their will. “If you leave 10% or more of your estate to charity, then the government will take 10% off your inheritance tax rate,” Osborne said. 

“This is an excellent reform, and we look forward to seeing its effect upon its introduction,” said Dr Salvatore LaSpada, chief executive of the Institute for Philanthropy.

Although this will not benefit the donor’s family at all, Osborne hopes this will go some way to creating a society where this level of philanthropy is the new normal.

“In principle this tax cut should encourage more legacy-giving and release a larger total amount for charities,” said Cathy Pharoah, co-director of the ESRC Centre for Charitable Giving and Philanthropy at Cass Business School, and author of an annual report on family philanthropy.

“But the challenge will be that charitable legacies are often residual so donors do not always work out the exact amount charities get. They will need to plan it more.”

For many wealthy families this level of giving is not unusual, but LaSpada reckons the incentive, which is scheduled to come into effect in April 2012, will accelerate this trend. “It is our hope and belief that this incentive will further encourage charitable giving among wealthy families.

“It will give them greater choice over what happens with their legacies, enabling them to give additional support to those causes that they are most passionate about,” he said.

But as this encourages charitable giving after death, is there not a worry it will discourage lifetime giving? Pharoah thinks probably not. “Inheritance tax relief on charitable giving has always been favourable in relation to lifetime giving, and I don’t think the new relief is large enough to swing the balance much further.”

And there are already tax incentives for wealthy donors who give generously during their lifetime, although admittedly these are not as large as in the US.

These reforms are moving in the right direction for family philanthropists, and have received an initially positive response. “The early indications from the donor community are that it will serve to galvanise giving by wealthy individuals and families,” said LaSpada.

But perhaps the most significant aspect of these reforms is not in their detail, but in the wider message the government is sending about its commitment to encouraging philanthropy. “It’s a great way of signalling how much value the government attaches to charitable giving, and its value in raising the profile of giving will act as a stimulus over and above the value of the tax relief itself,” says Pharoah.