Inheritance (tax) and charitable bequests: an intergenerational pact?

…Key points from my response to the Charity Tax Commission call for evidence

Inheritance Tax

Leaving a part or an entire estate to a charity can reduce or eliminate an Inheritance Tax liability as it will not count towards the total taxable value of an estate. An Inheritance Tax liability can also be reduced from 40% to 36%, if 10% of a ‘net estate’ is left to a charity in a will. Inheritance Tax relief totalled approximately £840m for individuals in 2016-17.

The promotion of inheritance bequests seems to me to be a particularly valuable and desirable avenue for giving. I suspect there is a lot of room here to convince people to donate more when they pass away. This is a form of intangible income, there is an uncertainty in its amount, and this amounts to future commitment. Evidence from (D Reinstein, Riener, and Kellner 2018), (D Reinstein and Riener 2012), (Breman 2011) and others point in the direction of this being particularly promising.

Whether this tax relief is the most appropriate response, and whether levels are set correctly, is an empirical question which I think we have little data on. The ‘gold standard’ price elasticity is still the relevant measure. We may also want to consider moving whether it would be effective to move to a ‘gift aid’ approach in this context, offering a match rather than a refund. However, I can see an argument (loosely driven by ideas of loss aversion) that people may be particularly find the rebate particularly valuable in this context. People may be particular averse to the idea of paying taxes on their inheritance, and the ability to avoid those taxes may be especially salient. My work and discussions with people considering ways to increase such giving, in particular, an initiative/startup called ‘Giving Docs’, suggests to me that most people have not considered leaving a charitable donation in their will, but would be amenable to doing so

In the domain of inheritances and bequests, the expectations of the testator (usually a parent) and prospective legatee (usually a child), and the ‘second order beliefs’ (beliefs about what the others believe) are likely to guide what is done and what is seen as right and morally acceptable. Here, I have specific proposals for mechanisms and incentives that will may enable larger charitable bequests and more charitable bequesting by mutual consent of both parties.

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