Budget 2020: Is this the way to tax reform?

Budget 2020: Is this the way to tax reform?

Daniel Fluskey | 6 March 2020

Dan Fluskey, IoF’s Head of Policy and External Affairs, predicts what could happen at next week’s Budget including an inheritance tax cut, the introduction of Mansion tax and changes to income tax – and looks at how the IoF would respond.

Another year, another budget. But this one feels like it might be different. It’s the first one to take place with the UK not being part of the EU since 1973 (or EEC as it was then), and with a strong single-party majority that we haven’t seen since 2005 when Peter Kay & Tony Christie showed us the way to Amarillo, new changes could be on their way.

What might they be? Well, the Charity Tax Commission gives lots of food for thought for the new Chancellor. We were pleased to see the recommendations included around a review of Corporate Gift Aid, directing higher rate tax relief to the charity via Gift Aid, and looking to bring in a VAT exemption for Wills which include a legacy gift to charity and hope that it’s sparking ideas and action in the corridors of Whitehall.

But there are also other areas, which we should be looking at as well. There have been some wider changes mooted – which while are not specific to charities, could have an impact on charitable giving and that we’ll be keeping an eye on.

Inheritance tax cut

What could happen?

A cut to inheritance tax (some proposals suggest a cut down to 10%), from its current rate of 40%. A number of tax-free allowances could also be dropped – including the ability to make a gift to family members tax-free (if done seven years before the person dies). There has also been an idea of a £30,000 cap on cash gifts over a lifetime.

Key potential issue: the availability of the tax relief (currently down to 36% from 40% if 10% of the estate left to charity).

What might the IoF say?

Having a financial incentive by reducing inheritance tax by leaving a charitable gift of 10% is a really important nudge to leave a legacy gift. It provokes a conversation around charitable giving, and also signifies the importance and value of charitable gifts through government providing the cut to inheritance tax. We would be very concerned if this was to be scrapped, and would want to see a charitable incentive retained in any new rates for inheritance tax. In addition, we’d like to see a wider incentive introduced (such as the VAT exemption on the cost of a Will) as this would mean that everyone has the opportunity to have a conversation about charitable giving, not just those who pay inheritance tax (currently about 5% of the population).


Mansion tax introduced

What could happen?

A tax on wealth/assets (rather than income, and additional to council tax).

Key potential issue: would wealthier people give less if they are taxed more?

What might the IoF say?

We think that there should be a fair tax system where everyone pays their part and ensures that there is sufficient money to fund better public services – demand for charity services has increased year on year to fill the gaps left through austerity. Currently, philanthropy and major gifts from wealthier people is not at the level it could be – less well off people tend to give a higher proportion to charity. While we want to encourage major giving and have a vibrant culture of philanthropy, this is not an either/or with a fair tax system. We are confident that wealthier people can, and will, give more as fundraising develops and we create a better culture of philanthropy.


Income tax changes (and corporate tax)

What could happen?

Changes in tax thresholds – could move the threshold higher to reduce tax (both for individuals and corporation).

What might the IoF say?

Corporate taxation changes should be accompanied with a review of Corporate Gift Aid (as per the Charity Tax review). The UK already has low levels of corporate tax, and if those were to be cut further then the incentive to make a charitable donation which reduces a tax bill could, potentially, result in a decrease in donations.

Over recent years we’ve seen the threshold increase on income tax rise with each Budget. That means that fewer people can give eligible Gift Aid, as more people are taken out of paying income tax, so it’s something to be aware of. If charities are able to claim less Gift Aid, then it makes the Charity Tax recommendation on directing higher rate to the charity even more important to the sustainability of charities. There may well be other ideas looking at taxing wealth rather than income (similar to the mansion tax) which we will be keeping an eye on too.


Daniel Fluskey is Head of Policy and External Affairs at the Institute of Fundraising

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