At the start of July, with funding from The Community Foundation for Ireland, Philanthropy Ireland released their report on the impact of the 2013 tax treatment on charitable donations. It is clear from this report that the current tax situation is not working effectively to encourage large scale giving in Ireland.
As part of The Community Foundation for Ireland’s commitment to both encourage and create a culture of large scale, strategic philanthropy we have been looking to Government to bring in reforms that will encourage this type of giving and bring our underdeveloped philanthropic environment in line with our neighbours in the UK.
Philanthropy in Ireland is in the halfpenny place. Effective policy exists only as aspiration. We have very few Foundations. Mainly because we don’t have the right policies in place, the opportunity to gather income, other than that taken in tax for good causes, is being lost. As evidenced by the research from Philanthropy Ireland, Ireland’s Charitable Tax Incentive Policy needs to change to provide for greater inclusion and to better align with international best practice in encouraging higher levels of philanthropic and charitable giving.
Change required:
1. A scheme for direct tax incentive to the donor to encourage major gift giving - implement the recommendation of the 2012 Forum on Philanthropy Report for Major Gift incentive (the only recommendation of the Forum not activated) as follows
- In specific cases of donations into designated vehicles (grant making foundations, trusts, donor advised funds and charities) that opt into the scheme, tax relief should go directly to the donor.
- There will be a lower limit of €5k for donations and an upper limit of €1m.
- The initiative should be reviewed after four years to assess effectiveness.
The current system has not had the intended effect in supporting charitable donations, with low level of engagement by charities (c20%) and a decrease of almost €50m in returns from revenue for a scheme intended to be cost neutral. The system is not working to encourage major gift giving with less than 1% of donations more than €5k.
There are relatively few grant-making trusts and foundations in Ireland compared internationally. There is a real need to provide specific incentives to support existing philanthropies and encourage the growth of new ones. This measure will help to create a culture of giving larger donations and encourage the establishment and/or further development of donor advised funds to invest in causes for public good.
At present, the available figures show that Irish charities receive about €50 million only in charitable bequests per annum. When it comes to charitable bequests, the leading countries are the US, the UK and Switzerland, where the total donated through this channel amounts to the equivalent of 0.13-0.16% of GDP. The equivalent ratio for Ireland is estimated at 0.02%. A more meaningful statistic is the ratio of total charitable bequests to the aggregate value of estates at death. For the UK, this is estimated at 3.2-4%, between 3.5 and 4.5 times higher than the equivalent ratio for Ireland (as estimated in our 2018 report Legacies for Good).
The inheritance tax system would appear to be an important factor in explaining differences in the volume of charitable bequests across countries. In this regard, it is noteworthy that both the UK and the US tax the estate of the deceased person, whereas in Ireland it is the beneficiaries of the estate who are liable to tax. Furthermore, there is strong evidence to indicate that tax relief boosts charitable bequests in those jurisdictions where liability for inheritance tax is borne by the estate. In contrast, it is very difficult to design a tax incentive that will encourage charitable bequests in circumstances where liability for inheritance tax is borne by the beneficiaries of the estate.
Change required:
2. Recognising this difficulty, in our Legacies for Good report, we proposed a measure that was designed to encourage the beneficiaries of wills to make donations to charitable or philanthropic organisations out of their inheritances. The proposal was that such donations be fully deductible from the amount of the inheritance liable to Capital Acquisitions Tax (CAT). This would be equivalent to adding the amount of any such donation on a €-for-€ basis to the relevant CAT Group Threshold. Given the current rate of CAT, this measure would imply a government subsidy of €0.33 for every €1 donated. The aggregate cost of the measure therefore (where cost is calculated as the amount of CAT revenue foregone) would simply be one-third of the aggregate amount donated.
In this regard, the UK provides an obvious, albeit rough and ready benchmark. As noted above, aggregate charitable bequests as a proportion of the value of estates at death in the UK are running at about four times the corresponding proportion in Ireland. If it is assumed that the difference in behaviour between the two jurisdictions is entirely a function of differences between the respective tax regimes (a strong assumption which ignores cultural factors), then it could be argued that replicating the UK treatment of giving in the Irish regime could result in a fourfold increase in charitable bequests here.
Change required:
3. In addition to the above which is set out in the attached paper from Jim O’Leary, economist, which focuses on the inheritors, we believe there is an opportunity now to explore a further opportunity to provide a more complete approach to growing legacy income in Ireland. This would mimic to some degree the UK legislation. An incentive could be researched whereby if a disponer bequests 10% of their will to charity that the CAT rate is dropped by 10% for those inheriting from that person.
Philanthropy is neither a substitute nor a supplement for tax. It is different. It is like every community effort, it is something that makes a wider contribution and sets an example. It can achieve social change and it sends a message that with more effort and generosity much more can be done. It both delivers, and it inculcates values.
We want philanthropy facilitated firstly with a political commitment that says it is important as one contribution among others to our community. And, we want what p say politically, to be followed through with specific policy changes to facilitate and grow philanthropy.
Click here to read Jim O’Leary’s research Legacies for Good presented to Government on the changes required to provide a more conducive environment for large scale bequests in Ireland.