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Advocacy

The UK needs to create opportunities that encourage the wealthy and the mass affluent to give more. One mechanism that promises to be transformative in its potential to stimulate giving would be the introduction of living legacies into the UK, which could leverage an additional £400 million in assets and income each year for charity.

Those who have more should be enabled to make substantial tax-effective gifts of assets and cash to charity during their lifetime. Donors and their families should have the opportunity to give at levels that can transform a charity’s operations and to enjoy the impact of their giving during their lifetimes. In addition, living legacies enable those who own capital assets but depend upon the income they generate to make a valuable and substantial commitment to charity during their lifetimes.

One other advantage of this mechanism is its potential to overcome one of the most frequently cited barriers to encouraging the wealthy and mass affluent to give more: financial security. Research suggests that an individual’s concern for financial security in later life can and does discourage many from giving more in their lifetime. If, however, an individual had the option to make a substantial tax-effective gift in their lifetime, and this individual were to receive a regular but modest income from this gift for the remainder of their life, we believe that wealthy and mass affluent donors would be likely to give significantly more to charity. We only need look to the US where living legacies have been in place for four decades and where charities benefit annually from $4.5bn in assets and $2.5bn in income.

Living legacies can offer individuals and families the pleasure of making a substantial gift in their lifetime and connecting with the organisation they have chosen to support. On death, a living legacy is treated like any other gift made to charity in a will and its value is not counted as part of the donor’s estate for inheritance tax purposes.

Living Legacies

Living legacies are widely used in the US, in Canada and to some degree in Germany, in which a donor makes an irrevocable gift to a charity during his/her lifetime, while retaining a proportion of the investment income on the gift for the term of his/her life. In this way, living legacies offer:

· For the donor, the psychological rewards of certainty over future income and the gratification of making substantial, transformative gifts to a good cause.

· A more long lasting, fruitful and engaging relationship between the donor and the charity.

· For the charity a guaranteed gift of significant value and a guarantee against loans.

LIVING LEGACY MODEL PROPOSED FOR UK

For the successful introduction of this mechanism into the UK we will need to formulate a simple model that can easily be applied to UK tax structures, reduces Government fears of abuse and avoids complex valuation of assets. The model proposed is as follows:

· The donor establishes a form of a trust and makes an irrevocable settlement of cash or assets eligible for charitable Income Tax relief of a minimum value of £50,000 to that charity

· The donor must select a Trustee or Trustees who controls and manages the assets of the trust

· The trust may pay to the donor, at least annually and for the rest of his/her life, or the defined term of the trust, an annual sum equal to no more than 4% of the total of the open market value of the assets at the end of the year. Index linked so no valuations required.

· Upon the donor’s death, or the term of the trust, the charity will receive the fund

· The donor may specify if the fund is for the charity’s general purposes or specific purposes (that is, unrestricted or restricted capital)

· In the first instance, cash only will be used but it is envisaged that all assets that are at any stage eligible for Income Tax reliefs on gifts for charity will become eligible for Living Legacies.

TAX IMPLICATIONS OF THIS MODEL

· The gift into the trust would be treated as a gift to charity for the purposes of Capital Gains Tax and Inheritance Tax

· The present value of the charity’s future receipt (based on standard actuarial calculation) is used to calculate the donor’s income tax relief on settlement. In essence, that value is deductible, against the donor’s income before calculating his or her tax liability, just as the value of quoted shares would be if they were given outright to the charity

· Deductibility can be applied backwards for one year, and can be applied forwards

· The donor is liable for income tax on income he or she received from the trust

· The charity receive the fund on the donor’s death or the defined term of the trust

ANTICIPATED IMPACT ON LEVELS OF UK GIVING

Potential income from Living Legacies in 2015

Total target group in UK

(UK higher rate and additional rate taxpayers)

3.3m

Average trust value

(a quarter of US average trust value)

£145,000

Total number of Living Legacies by 2015

(0.1 % anticipated take up)

3,340

Total trust value by 2015

£484m

Total asset value from new donors by 2015

(80% of donations from new donors as opposed to those who would have already given in their will)

£387m

Total increase to charity by 2015 (in both income and assets)

£398m

RECOMMENDATION

The case for living legacies has been presented to several Governments but as yet, none have explored the opportunity to grow giving through the introduction of charitable remainder trusts. Government should respond to calls to review the introduction of tax-effective charitable remainder trusts to encourage more of the mass affluent and asset rich to make substantial gifts to charity in their own lifetime. Consultation should draw on the expertise of tax advisers, wealth advisers, philanthropists – particularly the mass affluent and asset rich, and charities.

Reasons given for declining an exploration of living legacies include: a potential risk of abuse; complexity; concerns about losing tax revenue; and the valuation of assets. After extensive analysis, we conclude that these barriers can be overcome with the introduction of a simple mechanism.

At the March 2011 Philanthropy Review Summit, 55% of philanthropists considered the introduction of living legacies and inheritance tax incentives to be the most important fiscal solution to encourage greater giving from the wealthy and mass affluent.

This proposal is supported by

Age Concern UK

Bates Wells Braithwaite LLP

Bircham Dyson Bell LLP

Charities Aid Foundation (CAF)

Charity Tax Group (CTG)

Conner Associates

Cancer Research UK

CASE Europe

Farrer & Co LLP

Institute of Legacy Management (ILM)

Institute of Fundraising (TBC)

JP Morgan

Northern Trust

The More Partnership

Philanthropy Advisory Service

Philanthropy Impact (incorporating EAPG, Philanthropy UK and the Philanthropy Advisors Forum)

The Art Fund

The Philanthropy Review

The Society for Trust and Estate Practitioners (STEP)

Withers LLP

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