Rob Cope explores the critical role financial advisers play in helping clients gain tax relief while helping charities with legacy gifts
The past year has brought about a clear shift in public attitudes to end-of-life planning, with the global health crisis making us all too aware of our own mortality and the need to finalise our affairs. Public appetite for wills and, particularly, charitable bequests has reached record levels. But what does this mean for financial advisers? And how can practitioners best support clients in making use of the tax reliefs surrounding charitable giving?
Law firms across the UK are reporting increased demand for end-of-life planning. The Law Society says that although intestacy levels remain high at 59%, it is clear that the pandemic is driving change. Will writing is growing particularly quickly among online providers like Farewill, which has reported a 267% annual increase and an even sharper increase of 300% among the under-35s.
The crisis has prompted another notable shift. There is heightened awareness of the critical role of charities in our communities, from supporting NHS hospitals, hospices and air ambulances, to foodbanks, homeless shelters and assistance for the elderly and vulnerable.
Despite financial uncertainty, people want to help. They are continuing to donate and we are seeing a significant increase in the number of people choosing to write charities into their wills, with Co-op Legal Services reporting a 61% increase in the proportion of clients including a charitable gift in their will last year.
While this income will not be realised for some time to come, it has the potential to serve as a lifeline for charities in the years ahead. Legacy gifts – raising about £3.4bn in 2019, according to sector analysts Legacy Foresight – have never been more valued, or more needed. And this is where financial advisers can play a critical role; making clients aware of the tax incentives and encouraging them to have an up-to-date will that ensures their finances will be protected to the end.
The Law Society’s 2020 research indicates that one in five wills now includes a charitable bequest. From a client’s perspective, it is easy to include a donation alongside gifts for their family and friends. People can choose to donate any sum to any charity– there’s no need for it to be a large amount and there are generous tax breaks for doing so.
Charged at a rate of 40%, inheritance tax (IHT) can make a hefty dent in the value of large estates. As charitable bequests are tax-free, they extend the amount that people can leave in their estate above the nil rate band (£325,000) and residence nil rate band (£175,000) before IHT kicks in. Plus, clients that choose to donate 10% of their estate (or more) will benefit from a reduced IHT rate of 36% across their assets, which can amount to a considerable reduction on larger estates.
IHT relief is part of the government's long-term drive to support and grow legacy giving, which can be a powerful incentive, particularly for clients whose estates have just tipped over the tax threshold.
61% increase in clients including a charitable gift in their will in 2020Source: Co-Op
Although tax incentives are unlikely to be the primary reason for including a charity in their will, they are a natural entry point for advisers when looking to open up conversations about end-of-life planning. And when you consider that baby boomers are predicted to pass on £5.5trn to the next generation by 2047, according to research by Kings Court Trust, the opportunity for advisers of being part of this wealth transfer could be significant.
Of course, charitable bequests are just one of a range of tax incentives available to inspire philanthropy. These include Gift Aid, which increases the value of donations by 25% and allows higher-rate taxpayers to reclaim a further 25p on every £1 donated, Payroll Giving (a pre-tax salary giving scheme) and tax relief on gifts of land, shares or property.
Increasingly, higher-net-worth individuals are turning to financial experts to help them maximise their giving and make best use of the tax reliefs. In fact, 58% of the amount given by wealthy philanthropists (amounting to more than £1bn a year) is now guided by advisers and there is considerable opportunity for further growth in the market.
Having said that, strategic advice to support tax-effective giving need not to be reserved for the wealthy. After all,
the majority of clients give to charity (six in 10 people donate) and guidance for the most effective way to do so can be a highly valued part of any comprehensive financial planning.
The PFS will shortly be releasing a guide on this subject, covering more information about intestacy, will writing and IHT. To find out more, visit: www.pfs.org
Rob Cope is director of Remember A Charity – a consortium of 200 UK charities www.rememberacharity.org.uk
Image credit | Dan-Mitchell Ikon
Tips for maximising supporters’ giving
- Ask clients if they have an up-to-date will in your initial client questionnaire and during any annual review.
- Ensure clients are aware of the IHT savings that are available for those that wish to include a charity in their will.
- Encourage clients to consider family and friends first, while making them aware of the option of making a donation too – even a small gift can make a big difference.
- Don’t shy away from conversations about charitable giving – asking clients if they give and are aware of the relevant tax reliefs can help them maximise their gifts and potentially make considerable savings.