In response to the question “how was Budget 2012 for charities?”, I think the short answer is: “not good”. We weren’t expecting charities to be quite as prominent as they were last year, when there were quite a few charity-specific announcements (the IHT legacy incentive, Gift Aid small donations scheme etc), and were fully expecting to have to pore over the details to work out the indirect implications of other announcements.
What we didn’t expect, however, was for there to be one mention of “charity” in the speech, and for that to preface an announcement that existing tax reliefs on giving are going to be capped. This could be bad news for the charities, as major gifts play a vital role in the sector (for instance almost half of all donations last year came from just 8% of donors).
The detail of the announcement is that currently unrestricted tax reliefs will now be subject to a cap, so that anyone trying to claim more than £50K will be limited to 25% of their income or £50K (whichever is greater). From the charity point of view, this will affect the relief available through Gift Aid. It is not exactly clear yet whether the rule is intended to apply to the whole Gift Aid amount, or just the higher rate relief. I have assumed the latter here (as the former is too scary to contemplate, and this is pretty bad anyway).
Gifts of £200K or more will be subject to the new rules (as that is the amount of donation required to get £50K of personal relief). So if John Bigg-Altruist wants to give a gift of £1m, he would currently be eligible for personal relief through Gift Aid of £250K, but under the new rules that would mean he had to earn at least £1 million (in order for the relief to be 25% of income). Surely that is no problem, I hear you ask, as Mr Altruist must be earning plenty more than that? Well, perhaps not- what about people who have saved up or received a windfall and chosen to make a one-off large donation that is well in excess of their salary? There now appears to be a large disincentive for them to do so.
The problem might be even worse for those who want to set up a new charitable trust (either standalone, or housed within a larger organisation such as CAF or a Community Foundation): it is even more likely in these cases that a large, one-off gift will be involved, and many such donors rely on Gift Aid to top the amount up.
Let’s take as an example Mrs Good-Egg, a higher rate taxpayer earning £200K a year who wants to set up a £1 million charitable trust. Under current Gift Aid rules, this effectively costs her £600K. However, under the proposed new rules it would now cost her £750K (and if the rules do in fact apply to the whole Gift Aid relief, it would be £950K!) So there is a perverse incentive for the mass affluent with philanthropic aspirations to think twice about giving.
This situation surely cannot be what the government wants? The Big Society agenda, the Cabinet Office’s Giving White Paper and DCMS’s Philanthropy Strategy all make it clear that the government is keen to encourage charitable giving and, in particular, major donor philanthropy. Yet now they are proposing to introduce a rule that will make it less appealing for the very wealthy to give large gifts? This seems like a fairly obvious failure to join up thinking, and could be very damaging to their own aims.
It is good that the Government has said they “will explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations”. However I would suggest that the voluntary sector and fundraisers need to be involved in this conversation too, and that it needs to happen as soon as possible.
(NB: to preclude any objections about the calculations in this blog post, I should point out that I have stuck to using the 40% higher rate of tax. This is for the purpose of simplicity- obviously the situation is actually more complicated. For a donor paying the 50% rate, or the new 45% rate, the rules will kick in on smaller gifts (£133K and £160K respectively). The situation with gifts of shares is different again- in this case, gifts of as little as £50K may be affected).