Alex McDowell, Director of Fundraising at the Duke of Edinburgh’s Award and Vice Chair of Remember A Charity, shares his reflections on the potential impact recent changes to the Inheritance Tax (IHT) framework may have on legacy income.

The October 2024 Budget included Inheritance Tax measures that could significantly affect charities’ future legacy income. These impacts stem from one key change and two important constants. Having met with a group of professional advisers last week at Remember A Charity’s roundtable discussion, I’ve been reflecting on what this budget could mean for legacy giving and charities who receive legacy income. 

The Constants: Retained Charitable Incentives and Frozen IHT Thresholds 

Let’s begin by looking at what has stayed the same and why that matters. The government has chosen to retain the charitable incentives for estates that are liable for Inheritance Tax (IHT) – this is something we have campaigned for repeatedly over the years. It has also frozen IHT thresholds until 2030. The latter is significant because it means the number of estates that qualify for IHT is likely to continue rising as inflation drives up the values of estates. Naturally, this also means more estates will be able to benefit from charitable gift exemptions and a reduction in IHT rate (from 40% to 36%) where 10% of the estate’s net value is gifted to charity. 

Together these two constants are very significant for legacy giving. 

Why is that? Remember A Charity’s research with the Behavioural Insights Team and Co-operative Legal services shows that when solicitors or advisers simply mention the option of charitable giving, the likelihood of a charity being included in the will doubles and crucially, charitable IHT incentives are the most common reason for professional advisors to mention legacy giving with their clients.  

With clear evidence of an increase in legacy giving rate just above the IHT threshold, there can be little doubt these incentives influence charitable will-writing behaviour. What’s more, estates that incur IHT are disproportionately important to overall legacy income, with around half of the £4 billion charities receive annually from gifts in Wills coming from estates that make use of charitable gift exemptions. Notably, almost £1 billion of this income came from estates that leveraged the reduced IHT rate (of 36%) by donating at least 10% of the net value of their estate to charity.  

Now, let’s look at what’s changing. 

The Change: Inclusion of Pension Wealth in Estate Calculations 

The Chancellor also announced plans to include personal pension wealth when calculating overall estate value. This change is scheduled to come into effect from April 2027 and, when combined with the freeze in IHT thresholds, it could further increase the number of estates that could end up paying IHT. In fact, the Office for Budget Responsibility (OBR) projects that the proportion of estates that qualify for IHT will almost double from 5.2% in 2023/24 to 9.5% by 2030. 

These changes create both risks and opportunities for charities’ legacy income. 

At this stage, there’s a great deal of uncertainty about how the inclusion of pension wealth will be implemented. Pensions have traditionally been considered separately from Wills, and there is a fundamental difference between the ways people can choose to distribute their wealth through their will and through their pension. Within a Will, people have complete testamentary freedom, meaning they are able to divide their estate however they choose. However, when it comes to a pension pots, there is far less flexibility, particularly on charitable donations. This is an area in which Remember A Charity and its partners are currently seeking clarity and will potentially explore options that could enable people to donate to charity from their pension wealth in the same way they can from other parts of their estate.  

However this current inconsistency is addressed, the inclusion of pension wealth in total estate value will makes it increasingly important for people to consult advisers when drafting their Will. It may also result in an increased need for existing Wills to be reviewed or updated, creating more opportunities for professional advisers to present their clients with the option of legacy giving. With the proven impact these conversations have on legacy giving rates, it is not unreasonable to assume the inclusion of pension wealth in asset value could also lead to an increase in charitable Wills.  

At the same time, concerns about increasing tax burdens - real or perceived - could make people feel more anxious about their wealth and their ability to take care of their loved ones. This could reduce their openness to considering charitable legacies gifts, especially where the potential benefits of the charitable exemptions or incentives are less well known or understood. 

During periods of uncertainty – as is the current case with the recent announcement about the inclusion of pension wealth – making discretionary gifts or letters of wishes may seem more attractive. While this outcome may not directly impact overall legacy giving levels, if executors are left to interpret a legator’s charitable wishes (rather than simply distributing gifts to charities explicitly named in the will), the specific beneficiary charities could differ significantly to those the legator might have named themselves.  

These changes could be detrimental to smaller, less well-known charities that the executors are less familiar with. Equally, it might benefit local charities the executors know particularly well. Letter of wishes are also easier to change or update, meaning legacy giving could become much more fluid and making excellent donor stewardship all the more essential. 

With estates becoming more complicated and increasingly likely to be subject to tax, there is also a significant risk that the process of gaining probate and distributing charitable legacies will increase with a knock-on impact of charity’s income flows, especially in the immediate aftermath of the pension changes being introduced. 

Perhaps the biggest risk of all is a change in fundraisers’ behaviour or perceptions of legacy giving. 

While tax incentives have proved to be very powerful in growing legacy giving, the majority of legacy gifts currently come from estates that are unaffected by IHT. Collectively, these smaller estates generate around half of all legacy income charities receive which suggests IHT can change behaviour, but it is not the main motivator for legacy giving.  The changes announced in the budget may create further reasons to discuss legacy giving with charity supporters but disproportionate focus on tax incentives could also push legacy fundraising back to the margins and result in legacy giving returning to being seen as subject best left to specialists, rather than something any fundraiser feels comfortable talking about or losing sight of what matters most to individual donors. 

Moving Forward  

Where does all this leave us now? As a sector, we have made huge strides in normalising legacy giving, both within and beyond our charities. The current environment makes is it all the more important that we continue to work collaboratively through Remember A charity with colleagues in the legal and financial sectors to ensure supporters are aware of the changing financial implications and potential benefits of donating through their Will. We will also work with the Probate service and HMRC to address any issues that arise as a result of the changes that have been announced. But we must also guard against legacy fundraising’s regression to a niche or technical discussion that is feared by fundraisers and leads to a reduction in the number of supporters being inspired to give through their will 

Fundraisers must continue focusing on donor’s personal motivations for their support and how their values can live through the charity’s work, ensuring that legacy giving remains an accessible, inspirational and meaningful option for anyone who share a charity’s vision.