rose to ask Her Majesty's Government whether they will introduce charitable remainder trusts.
My Lords, I am very grateful for the opportunity in this short debate to seek to persuade the Government to introduce the system of charitable remainder trusts. This initiative comes from the Institute for Philanthropy and from others in the charitable sector, including our great universities and education generally, including charities for the underprivileged, medicine and healthcare and the arts and heritage, all of whom have been working closely on this subject for several years. I am most grateful to them all for their help and to my noble friends and noble Lords of all parties, speaking for a wide variety of charities, who support this initiative. In particular, I thank those who have found time to take part in the debate, and the Minister who is here to reply for what I hope he will be able to say.
Charitable remainder trusts have been highly successful in the United States. Over the past 30 years they have raised more than $110 billion in support of charity. The reason for their success is that they have given the opportunity to individuals and families who are prosperous, but by no means super-rich, to give generously to charity without depriving themselves and their children in the mean time of moneys necessary for their own support. The figures suggest that there are some 3 million people in this category in Britain today, with free assets of between £70,000 and £350,000—there are more, of course, with slightly larger assets.
Because the assets which are placed in such trusts are often pregnant with capital gain, whether they be shares or real property, they enable such assets to be sold free of the capital gains tax and thus to produce income from their full capital value, both for the settlor and—I say to the Minister—for the Treasury, which would not otherwise have benefited from their realisation for many years, if at all. They also give the settlor an immediate tax credit, the size of which depends on the length of time before the remainder fund enures to the charity.
To give an example, the intending settlor—it may be a husband and wife—may have shares owned for many years; or perhaps a second home, which has likewise appreciated greatly in money terms, but yields little or no income; or perhaps pictures, jewellery or other works of art—all, say, to a value of £500,000, with a built-in capital gain of £200,000. They wish to have an income for the remainder of their joint lives and then for the fund that remains thereafter—the remainder—to go to charity. That may be one charity or a series of charities; they may seek to appoint who it goes to later.
The immediate tax credit against their current income would be based on the actuarial value of the fund—say £200,000—which, at 40 per cent, would save tax of some £80,000. The assets, once in the trust, would be realised, and the couple would then receive an income of around, say, 4 per cent or 5 per cent—£20,000 or £25,000—per annum, worth, I would remind government, some £8,000 or £10,000 per annum to the Treasury in extra tax take. Invested in a balanced fund, this should allow for reasonable capital growth and thus income growth over the years as the capital appreciates. On the second death, the charity would inherit.
Such charitable remainder trusts are skilfully promoted by charities in the USA. In Britain charities—major and minor, including our great universities—are eager to do likewise. They work closely with fund managers, who will manage the investments and also explain and handle the technicalities.
The size of the available market from which such charitable giving is likely to come can be estimated from an estimate of United Kingdom wealth distribution published by Mintel, concentrating on the sectors Mintel describes as "affluent". Taking those with average free assets ranging between £70,000 and £350,000, there are some 3.25 million people, with such free assets totalling more than £500 billion. As I said, most of them need the use of this money to maintain themselves in their own lifetimes and, perhaps, to help their children or elderly or other dependants. But with the help of a scheme like CRTs, they are likely to be willing to unlock a significant part of such assets for the long-term, but nonetheless very valuable, benefit of charity.
Naturally the Treasury will wish to work out what the cost to the Exchequer is likely to be over time. Funds currently placed in charitable remainder trusts in the USA exceed $100 billion—say £60 billion—but this is after the scheme has been available for some 35 years. They grew slowly at first. The idea would presumably take a few years to catch on here. If one makes a broad estimate, based on the relative sizes of the UK and US economies—ours is roughly one-sixth the size of theirs—in time total funds via charitable remainder trusts might reach £10 billion.
Some revenue would clearly be forgone by the Exchequer from the initial tax credit and from the Treasury's "hope" of some large CGT payments not protected by tax planning. These should not be exaggerated, as they would probably have been reduced by other legitimate tax-planning measures. As I said, the income for the settlors and hence the income tax yields for the Treasury are likely to be enhanced and certainly received early. But I do not wish to make any case on spurious figures. I simply say that any tax forgone is likely to be very small against the overall capital figure of, say, an extra £10 billion finding its way to charity, and very small indeed against annual government income tax receipts, which in the past financial year totalled some £123 billion or, over 20 years, £2.5 trillion. An infusion of moneys to charity on this scale would surely be extremely welcome. Many of those charities, as the Government well know, carry out tasks and meet needs that might otherwise fall to government.
A further practical and philosophical benefit is the close interest that settlors of charitable remainder trusts often take in the charities of their choice—in other words, those charities that will ultimately benefit from the remainder fund. They show this in both voluntary effort and often in additional giving through ordinary gift-aided methods.
It is certainly Conservative philosophy to seek to promote and enhance the role of the charitable and voluntary sectors, and I believe it is an area that the present Government also think important.
I hope that the 10 weeks' notice of this short debate has enabled those helping the Minister to locate and dust off the files. Serious talks were held by the Institute for Philanthropy with the Government in October 2001, just four years ago, when John Whiting, three United States tax lawyers and a representative of the Rockefeller Foundation were all over here and met both Paul Boateng, then Chief Secretary to the Treasury, and the Chancellor himself, who showed close interest for the best part of two hours—for which we are most grateful. Since then charity tax officials have explored the matter and raised what they saw as some potential problems. We believe that these have been adequately and sensibly answered. We are certainly prepared to answer further questions and to give further explanation if necessary, but we do not think that there ought to be any serious cause for deep concern about tax drainage.
I therefore urge on the Government that the time has now come to implement charitable remainder trusts in Britain, to the advantage of the generously minded citizen and the very large potential benefit to charity.
My Lords, I thank my noble and learned friend Lord Lyell of Markyate for initiating the debate and for his clear introduction of the subject. I give him my full support in his quest for charitable remainder trusts.
Like so many Members of your Lordships' House, I am engaged in several charities. Charities deliver a huge number of services and on the whole deliver them very efficiently. Taking a charity such as Tomorrow's People, every pound spent by it is one and a half times more efficient at getting people into long-term employment than through the statutory services.
Cancer Research UK is the largest cancer charity in the world. We are bigger than any in the United States, but we need to generate £1 million every day of the year. We work steadfastly to beat this dread disease, increasing the chances of survival, prolonging time in remission and enhancing the number of cures.
At Chailey Heritage School, a Sussex charity, we have to generate £3.5 million a year to educate and care for the most severely physically and mentally disabled children. Despite their profound disabilities, we help to release their hidden talents, add to their skills and enhance their quality of life.
At St George's Medical School, we have raised just under £1 million in three years to turn a very grotty student reception and recreation area into a place of pride for future doctors who will cure, treat and care world-wide. That is a pretty diverse group of charities but they all have something very much in common. They all have to attract cash from the big philanthropic trusts, without which none of them could continue.
As a nation we have set up the National Lottery to provide for those efficient and effective charities. But, sadly, I am afraid that, like a honey pot, it has proved irresistible to the Government's sticky fingers. Charities rely on the generous public who give not only money, but also their time. There are 20 million people now involved in charitable work. They choose those charities which they see as important and those to which they want to give.
The Government have organised a good precedent in their creation of city academies. The donors are involved not only in taking a close interest in the school, but in keeping a close watch on their generosity, seeing that their money is well spent. But, of course, city academies are for the very rich and not many of us have such wealth. But we give of our time, we are interested and we put effort into fund raising. In fact, I do not think that I have got a friend left. They see me coming along the street and they cross over.
We talk so much about the health service being "patient led", about schools being "pupil oriented", about people "standing on their own feet" and being "given information so as to come to correct decisions". But these are mere government-generated clichés, which too often extol the virtue of doing what is on the current political agenda.
We must credit the people who have worked hard throughout their lives—people who have made decisions and have exercised initiatives—and who have generated albeit modest rewards. Surely, it is reasonable to suppose that they will know and care where their money will be best used, having spent time and energy to work with and for a charity during their life-time.
The Home Secretary recently stated:
"We have a vision of a society where voluntary activity flourishes (and where all are enabled to play a full part in civil society). To this end, the Government is determined to do all it can to make it as easy as possible for those who want to contribute to do so, and to help develop a culture in which charitable giving is a natural part of everyone's life".
Charitable remainder trusts will help to do just that. Does the Minister agree with that? Will he seek to influence the Chancellor and the Treasury to introduce CRTs, thereby helping Mr Clarke to turn his vision into a reality? He would be hugely popular, so would Mr Clarke and Mr Brown. That is a strong motivation for any government.
My Lords, I declare my interest as the director of the Joseph Rowntree Foundation and the chair of the Giving Forum, a body which draws together key organisations concerned with increasing charitable giving in the UK. I am very grateful to the noble and learned Lord, Lord Lyell, for bringing forward this debate on charitable remainder trusts or, as we tend to call them in the Giving Forum, "lifetime legacies". I am grateful, too, to colleagues who have advised me on these matters; namely, Helen Donoghue from the Charities Tax Reform Group, Judith Hill from the solicitors, Farrer & Co and Michael Pattison from the Sainsbury Family Trusts.
We have heard tonight already of the benefits for charities and donors which could result from the creation of charitable remainder trusts. In my few minutes, I want to look at the possible grounds for anxiety about CRTs; namely, possible risks of abuse and the fear that rich people will use charitable remainder trusts for tax-dodging purposes. Of course, the very rich can already get good tax advantages from simply parting with income or capital assets here and now, claiming full tax relief on their gift against their present income, leaving the charity to get the same advantages in relation to capital gains tax without the more complicated arrangements of charitable remainder trusts. Rather, it is the not-quite-so-rich, often living on pensions or annuities, who need the comfort of continuing to receive income from the assets that they give away.
However, the question which the Treasury and Her Majesty's Revenue and Customs can rightly ask is whether there are subtle abuses which would allow donors to have their cake and to give it away. The first concern is that arrangements might be made which involve charities that do not fall under the jurisdiction of the Charity Commission and the regulation which that body can exercise. In particular, because there is no regulator equivalent to the Charity Commission in Northern Ireland—but the same tax regime applies there—charities could be established which escape any public oversight. This problem would seem easy to avoid: legislation could ensure that only charities subject to regulation by the Charity Commission or comparable body could be recipients of donations through charitable remainder trusts. Since it is likely that Northern Ireland will be covered by such regulation in the not-too-distant future, charities there could then come into the system.
The second hazard is that the donor might interfere with the trust—for example, investing proceeds only in those investments that produced a high income; that is, with the greater risk that the capital value is not maintained and that the charity eventually receives less than the original gift in real terms. Such difficulties would be overcome by simple rules requiring a separation of interests between the donor and the administrators of the trust. For example, only a trust administered by an approved body, required to handle the investments in a prescribed manner, would be permitted. It would seem relatively straightforward to require that trust deeds follow a prescribed format, which could include prohibition on donors being involved in any way in the administration of the trust and could even require that at least one trustee must be a corporate trustee regulated by the Financial Services Authority to reinforce the position.
I suppose that there are always risks of abuse associated with the affairs of charities, but these would not seem to be increased where formally constituted charitable remainder trusts are involved; indeed, these provide an opportunity to incorporate features which are not possible in the generality of charitable giving.
Therefore, would the Minister be willing to meet with members of the Giving Forum, including the Institute for Philanthropy, the Institute of Fundraising, the Charities Aid Foundation and the Charities Tax Reform Group to see whether any remaining obstacles can be overcome to introduce opportunities for lifetime legacies—for charitable remainder trusts—as proposed by the noble and learned Lord, Lord Lyell? There could be a very big prize in tapping into the capital assets of those not in the very rich category but in the less secure middle ground where incentives for giving capital, but not income, could unleash substantial resources for important charitable causes, such as those listed by the noble Baroness, Lady Cumberlege.
My Lords, the whole House should be grateful to my noble and learned friend for raising this important topic and for giving us a chance to debate it today—not just this House, but also the whole charitable and voluntary sector. This is a very important potential component of the future funding of the sector. I hope that the debate will help to bring a little global warming to the historic glacial attitude of the Treasury to this topic.
I first came across this issue during the recent passage of the Charities Bill through your Lordships' House. However, I must make it clear that although I led for the Opposition on that Bill, I have no such responsibilities today. The official response lies in the capable hands of my noble friend Lady Noakes. I speak for myself from the Back Benches.
Perhaps it is worthwhile looking at the Government's policy towards charities. At Second Reading of the Charities Bill, the noble Baroness, Lady Scotland, said:
"The Government's three aims for the Bill are: first, to provide a legal and regulatory environment that will enable all charities . . . to realise their potential as a force for good . . . secondly, to encourage a vibrant and diverse sector independent of government; and thirdly, to sustain high levels of public confidence in charities".—[Hansard, 20/1/06; col. 883.]
There is little doubt that the first two of these—enabling all charities,
"to realise their potential as a force for good", and encouraging,
"a vibrant and diverse sector"— would be enormously helped if charitable remainder trusts became a regular feature of the charity landscape.
The debate that night and our debates in Committee were much illuminated by the contributions of my noble friend Lord Sainsbury of Preston Candover. I hope very much that the Minister's officials will find the time to look through the debates that we held and read the speeches of my noble friend. He has a distinguished record as a philanthropist and has established his own foundation, the Linbury Trust. So he speaks with great authority and experience.
His experience is that the establishment of a personal foundation, often suggested as an alternative to a CRT, has become increasingly unattractive because of the regulatory framework, in particular the charity accounting SORP, the statement of recommended practice. In the same debate he said:
"Last year, research was published by Philanthropy UK which suggested that a fifth of wealthy people considering establishing a grant making trust decided not to do so because of the bureaucracy it involved . . . A senior QC tells me he now advises his clients only to give out of income rather than endowing a grant making charity because of what he calls unwarranted interference by the authorities".—[Hansard, 20/1/06; col. 904.]
By contrast, studies made of the experience in other countries show that CRTs are a valuable vehicle for encouraging donations from individuals who are unable or unwilling to release assets immediately because they offer the security of an assured income. As my noble and learned friend said in his opening remarks, they are attractive to a significant group of relatively affluent individuals, in particular a category called the mass affluent. For such people, existing tax breaks really do not provide sufficient incentive to give. The noble Lord, Lord Best, made some extremely compelling remarks about the fallibility of and fallacies in the tax evasion argument, and I hope the Minister will be able to take up the invitation and invite the noble Lord to the conference he seeks.
I urge the Government to encourage the use of CRTs because they address the question of people's insecurity about giving away capital from which they might need income in the future. This is of particular significance in view of the worries many harbour over pension provision, longer life expectancy and the increasing costs of care in old age. They are also an effective way for the Government to work in partnership with the charitable sector and to enhance the scope for philanthropic activity among groups that have been identified as relatively reluctant givers in terms of their wealth and disposable income. The Government talked a lot about encouraging philanthropy during the passage of the Charities Bill. This is a practical example of how they could move from talk to action.
My Lords, I speak in strong support of the proposition that charitable remainder trusts be introduced in the UK, as advocated by the Institute of Philanthropy and others, and I should declare at the outset a range of interests in so far as if such a scheme were to be implemented, it would clearly benefit Oxford University where I work, the Royal Society with which I have a rather direct association, and a host of other universities, learned societies and other charitable institutions with which I have less direct association.
The noble and learned Lord, Lord Lyell, introduced the debate with an admirably clear description of how charitable remainder trusts work and of the great benefits they bring to charitable institutions in the United States. He also acknowledged the costs to the Exchequer which I have reason to believe are relatively small compared with the benefits.
My enthusiasm for such schemes derives from the 16 years I spent at Princeton University as the vice-president for research before moving to Britain in the late 1980s. Twenty years ago, charitable remainder trusts—they are known by different names in the United States and there is a more complex array of possibilities, some of them legally much simpler—brought to Princeton something like $50 million annually, along with other forms of giving; they were just one of many forms of making donations. Goodness knows what they bring in today, but I am sure that it is more.
When in 1997 I became the Chief Scientific Adviser to the Government on their election, I had a meeting with the Chancellor to speak of my enthusiasm for the scheme, and captured his attention. He referred me to his officials, but after a decent interval for reflection I received a letter from Treasury officials explaining in a rather condescending tone that there would be costs to the Treasury for such a scheme, and essentially telling me to mind my own business. The general tone was that this was a disreputable thing to be talking about. I wish I had kept the letter. It spoke eloquently of a culture that did not look outwards to the experience of other countries.
So I warmly welcome today's debate. I believe that charitable remainder trusts in the United Kingdom could convey benefits that go beyond the excellent and obvious one of large injections of capital into universities and other institutions in the charity sector. They have an additional purpose in that by providing an incentive to giving, they would help to change the UK culture towards the significantly more philanthropic one found in the United States. I find it a perpetual puzzle that in the US, both at private and at public institutions if you come from out of state, people pay what seem to us huge sums of money for their education and emerge with a sense that they have not paid the full real cost, and there remains a lifetime engagement. In this country, however, as is the case in my own country, Australia, people take for granted an essentially free education and emerge from it with little or no sense of indebtedness. So such a culture change is greatly to be encouraged and is something almost separate from the specificity we are talking about. But I believe that it is an important ingredient in helping to bring about a culture change which I think the Government wish to see and certainly have every reason to want for societal reasons no less than for the financial ones.
My Lords, I speak in this debate for reasons similar to those of my noble friend Lord May of Oxford. I have past experience of fund-raising, essentially in three areas: the first was for a hospice; the second was for a learned legal institute that could not keep going without charitable donations; and most important, in my experience, on behalf of the University of Oxford. We embarked on quite a major campaign of fundraising when I was there. Apropos of what has been said so eloquently by my noble friend Lord May of Oxford, one thing we realised when we started fundraising was that the mental attitudes of our Oxford graduates were about 800 years out of date. Everyone assumed that their education was free, that they owed nothing and would have nothing to put back.
So we studied the American experience, which was extraordinarily illuminating. Even more breathtaking is the size of the funds raised by individual universities. My noble friend referred to Princeton. The figures for Harvard are huge. Experts carried out a survey on our behalf that gave us comparable figures for the Ivy League universities, and not just for them. An enormous amount of money is raised for these bodies, which are an essential prop of our civilisation.
While I am not making a particular appeal on their behalf, I shall underline the problem. The needs of the universities for charitable giving are acute at the present time. So also are the needs of those who are sick. The medical and cancer charities are in desperate need of continuous funding, as are the churches which are falling down. The need for money is huge, and here we are being told about an instrument for raising money which has operated for many years in the United States and seems to work very well. The advantage from the donor's point of view is, of course, the retention of the right to income during the lifetime of the donors should they happen to nominate themselves as beneficiaries. That, they will get. But, as the noble and learned Lord, Lord Lyell of Markyate, pointed out in introducing the debate, the donors tend to establish a link with the charity. That can lead on to more giving and participation in the life of the institute or hospice which needs the donations. So it is not simply an impersonal giving of money; it can lead to personal contact.
If there are objections to this, we want to hear from the Minister what they are. Are they objections of principle—the sort of fears voiced by the noble Lord, Lord Best, about fat cats establishing some racket out of this new type of giving? It seems highly implausible, but, if there is an objection of that character, it ought to be brought out and exposed. Or are the difficulties merely of a technical nature, which could be solved by people of good will sitting around a table and working out the details? If the problems are merely technical, they should be resolved. We all want to hear why the Government would not welcome this as a new instrument in the armoury of charitable giving, the demand being so huge and the willingness to give being very apparent.
My Lords, I thank the noble and learned Lord, Lord Lyell of Markyate, for introducing this important short debate. I also thank the Institute for Philanthropy. I should add the name of the Lifetime Legacies Coalition, which has done so much to highlight the importance of this subject and to advocate the virtues of the proposal. I am sorry that we are not going to have the wisdom of the noble and learned Lord, Lord Browne-Wilkinson, tonight, but at least we know that he is listening in to our deliberations.
I should declare my own interests as a partner of Bates, Wells and Braithwaite, which acts for quite a number of the charities and bodies that are part of the Lifetime Legacies Coalition. Also, as trustee of various charities and chancellor of the University of Essex, I was particularly sympathetic to the remarks of the two noble Lords who spoke latterly.
The noble and learned Lord, Lord Lyell, set out the case clearly. He spoke of America, where £110 billion has apparently been given under this scheme. He spoke of the 3 million British people who have free assets at a level where they might well take advantage of the proposed reform. He convinced me that there was little or no revenue disadvantage to allowing the proposal. He said the tax problems were superable.
The noble Baroness, Lady Cumberlege, gave us the example of the city academies that might benefit from this proposal and emphasised the incentive to be generous. The noble Lord, Lord Best, usefully concentrated on the issue of abuse, because with tax reform abuse is always, rightly, the first consideration of a government. From what he said, and from what I know, there is no reason to suppose that there would be substantial abuse here. I add my own small thought: one might well give the remainder charity the right to appoint a trustee during the lifetime of the settlor donor, which would be a direct way of ensuring that there was no abuse.
The noble Lord, Lord Hodgson of Astley Abbotts, reminded us of the debates during the passage of the Charities Bill, in which he and I were only too involved; he is right that this measure would be slap bang in the middle of the Government's own stated ambitions for charity. The noble Lord, Lord May of Oxford, with his great experience of both Harvard and Oxford, was right to talk about the need for a culture change and the possible benign impact of this reform upon that. I could not agree more with him. One has to take into account the fact that we have the bizarre situation of a declining level of giving in terms of the real wealth of the nation, and the even more bizarre fact that the top 10 per cent of earners give less as a proportion of their income than the bottom 10 per cent. We need to break out of this frankly not very flattering culture. In his contribution, the noble Lord, Lord Neill of Bladen, agreed with what the noble Lord, Lord May, had said.
I will add only a couple of thoughts. First, accelerating the prospect of significant generosity has a number of effects that are not obvious. I speak now as a long-in-the-tooth solicitor who has often seen old people who have lost their confidence and their sense of independence, are becoming enfeebled, whether intellectually or physically, and are losing the spirit of generosity which, if it had been allowed to express itself earlier, would have led, I have no doubt, to bold gift-making. These trusts allow just that. One has to acknowledge the reality that people who live in an extremely materialist and competitive world and give away a lot of money want these days to feel that they get some esteem or recognition for it. We might all wish that we were purer in our motives, but that is the reality. A man of 50, allowed by this proposal to give a major gift to a named institution, would expect, and would get, esteem and recognition, as well as—dare I say it?—an involvement with the charity so benefited. That is amazingly infectious. I find clients who have been generous are always delightfully surprised at how much the connection then means.
Secondly, to allow this reform would be a coping stone for the tax reforms that have been bipartisan in this country. It would be enlightened self-interest for the Treasury, for every pound given to charity is geared up immensely by the volunteer effort that always comes in behind it.
My Lords, I start by declaring my rather modest interest, compared with those of noble Lords who have spoken before me: I am a director of the English National Opera, which would potentially be one of the beneficiaries of charitable remainder trusts, were they to be introduced in this country. It has been a privilege to hear my noble and learned friend Lord Lyell of Markyate bring this issue to your Lordships' House today. It is clear that he has a real commitment to the charity sector and I know that that sector will be grateful that my noble and learned friend has secured this debate.
We have long supported the charity sector on these Benches. Of course I claim no monopoly on this, but we have a vision of the sector based on more power and freedom for it than is currently the case. We do not want charities to be beholden to the Government through complex and restrictive contracts. We want them to have more freedom, less interference and, as important, less bureaucracy. Our vision for the charity sector is not just about how government interfaces with that sector—we want the sector to be genuinely free, and that requires, in most cases, a higher degree of economic independence than currently exists. My noble and learned friend's idea for a new method of facilitating individual giving through these trusts is a major contribution to the debate.
The idea comes from the US, which has a much stronger tradition of personal charitable giving, on the back of more extensive tax reliefs, as well as a lower marginal tax rate. In this country we already have a number of tax reliefs in our system, but we also know that they are not fully utilised. I understand that only about 30 per cent of giving in the UK is tax-effective. There must be more that the charity sector can do to increase its income by maximising the reliefs that are already available.
My noble and learned friend's ideas are particularly interesting because in the US this appears to appeal not only to the rich, as he has pointed out, but to those of much more moderate means. In this country, around 60 per cent of personal giving is concentrated among about 5 per cent of donors. If a way were found to spread significant giving across a larger number of donors, the benefit to charities' finances is obvious.
I know that my noble and learned friend will not expect me to say that charitable remainder trusts will be a part of the policy of our party at the next election. It would be lovely to say that we will accommodate all such good ideas, but the plain fact is that our first priority on taking office will be to ensure the stability of our public finances. Only when we have achieved that can we move on.
I am sure that my noble and learned friend is aware that we have embarked on a wide-ranging set of policy reviews, one of which is our tax commission, chaired by my noble friend Lord Forsyth of Drumlean. I hope that my noble and learned friend Lord Lyell will ensure that today's debate is drawn to the attention of my noble friend and his commission. Our tax commission is charged in particular with looking at ways of simplifying our tax system. One of the drawbacks of charitable remainder trusts is that they could further complicate our tax code, which has already been massively overcomplicated by eight years of finance Acts.
The Minister has told us several times that complexity in the tax code is a response to avoidance. The plain fact is that tax reliefs and incentives are sometimes only a hair's breadth away from avoidance. The noble Lord, Lord Best, outlined some of the possibilities that may be worrying people on that score. Charitable remainder trusts may involve not only complex legislation in introducing them, but another raft of anti-avoidance measures to ensure that abuse does not follow. That is not the general direction in which we will want to go when we have custody of the tax system again.
For all those caveats, my noble and learned friend Lord Lyell has put an important issue of support for charitable giving on the table. We know that the Government have been looking at this for some time, yet we have heard no proper response from them. I hope that the Minister will tonight give us a straightforward account of the Government's views.
My Lords, I add my welcome to the opportunity to debate this matter this evening and to thank the noble and learned Lord, Lord Lyell, for providing it. In doing so, I respectfully remind your Lordships' House that primacy on issues of taxation rests with the other place. That is ultimately where these matters will have to be settled.
The Treasury and HMRC have had extensive discussions with voluntary sector representatives and professional advisers who have advocated the introduction of tax relief for gifts made through charitable remainder trusts. This Government are committed to a strong voluntary and community sector. Encouraging individuals to give to charity is just one aspect of that commitment and we have a number of measures in place to support charitable giving.
Since the introduction of the Getting Britain Giving package in 2000, the range of tax reliefs for giving is broad and generous. Gift aid was improved in 2000 to apply to donations of money, whatever the amount. Individuals who are UK taxpayers can authorise the charity to reclaim income tax at the basic rate on their donations. If the donor is a higher-rate taxpayer, the donor can reclaim the remaining tax on his next self-assessment return. The growth in the use of gift aid has made a real difference to charities. In 2000–01, £222 million was repaid to charities in gift aid donations. In 2004–05, this figure had grown to £625 million. Higher-rate taxpayers reclaimed £150 million in 2004–05 on their gift aid donations.
Payroll giving enables employees to give through the payroll and to get tax relief up front. In 2004–05, £83 million was given in this way, and many charities value the regular income stream that payroll giving provides. Since 2000, income tax and corporation tax relief has been available for gifts of quoted shares and securities and, in 2002, relief for gifts of land and buildings was added. Gifts to charity of money or assets are exempt from capital gains tax and inheritance tax. With such a range of reliefs, is there a need for any more?
There is considerable scope for the existing reliefs to be more widely used. Research for HMRC demonstrated a low level of awareness of the existing tax reliefs. The Charities Aid Foundation said that only around a third of donations are made through gift aid and that this could be increased to 60 per cent. The noble Baroness, Lady Noakes, made that point. Payroll giving is offered by only around 2 per cent of employers.
This Government are playing their part in encouraging the use of the tax reliefs for giving. We provided most of the funding for the Giving Campaign, which raised awareness among charities of the reliefs and provided toolkits to support them. In January 2005, the Home Office launched a scheme to encourage small and medium-sized employers which have fewer than 500 staff to offer payroll giving. So far, the number of SMEs offering payroll giving has increased from 901 to more than 2,100.
With so much more to achieve through the current reliefs, we need to consider very carefully whether any new relief would bring about additional giving and whether that additional giving would outweigh the costs involved. Charitable remainder trusts are complex vehicles for most donors and charities to understand, and it is not clear that there is a market for such a method of giving in the UK.
Another question we must ask is how important tax relief is in encouraging charitable giving. The decision to give to charity is influenced by all sorts of factors. Tax relief is just one and, for many individuals, it is not decisive. Motivation for giving is influenced by a range of factors, such as commitment to the cause or religious beliefs. Research by the National Council for Voluntary Organisations and the Charities Aid Foundation tells us that gender and regional variations in levels of giving exist. Research for HMRC shows that, where donors know about the reliefs, those reliefs do not influence greatly the decision whether to give or how much to give.
So would a relief for giving through charitable remainder trusts make a difference? Those who are campaigning in support of the proposal cite the success of these vehicles in the US. The noble Lords, Lord May and Lord Neill, spoke about that matter. We need to be sure that the evidence shows that CRTs have boosted giving by the wealthy rather than just facilitated it. We know that reducing tax liabilities—estate duty in the US—is a prime motive, as witnessed by the marketing material. The culture of giving in this country and the tax system are quite different and we need to be careful not to draw too many parallels. I understand that a charitable remainder trust may give a charity a degree of certainty that a legacy does not—wills are often challenged or changed—but how many people will be prepared to make an irrevocable gift into such a trust and would these be the very people who would leave legacies to charity in their wills anyway?
These are complex vehicles that might bring additional costs to donors, charities and HMRC. The noble Baroness, Lady Noakes, made reference to that. I took the opportunity to look at the website of the Institute for Philanthropy and went through the opinion provided by James Kessler QC on what the outline of a trust might look like and the sort of issues that cropped up which would have to be addressed. Would it be directed only at individuals? Were there any restrictions on residents or domiciles? Who specifies the charities? How long could the non-charitable period last? What about the income that arises to the trust? Would there be a difference in providing an income that would come out ordinarily from what the trust generated or an annuity? What happened if the arrangement was for higher-than-market yields—would that be permitted?
The inheritance tax relief would have to cater for different circumstances, whether it was just the settlor who had the interest in possession or somebody else. What gifts should get income tax relief? Would it just be cash, land, shares, securities or works of art? How is the income tax relief to be calculated? Is there to be a minimum level of the reversionary interest? How can the income tax relief be used? Can it be carried forward, back, set against gains or just income? What about the anti-avoidance rules that are already in place in relation to gifts of qualifying investments? There are more measures. I do not say that technically these could not be dealt with, but it would clearly be a complex process.
My Lords, the points of principle could be settled quickly but the drafting that would be needed to put those into the legislation would certainly involve complexity. We know from practice that whenever complex rules are established someone seeks to avoid them, therefore you have evermore complex rules. That is the history of so much tax legislation in recent times.
My Lords, I am most grateful to the noble Lord for giving way, but is he aware that one of the proposals is that there should be potentially a set form which would have to be used to take advantage of the relief? It would not involve the Revenue in a plethora of different types of trust and so on or, indeed, settlors. Would that not get round much of the concern that he is expressing?
My Lords, there might be a set form and a set process, but the legislation that underpins the arrangements could be complex. The points that I have just run through, which are just some of the issues that came out of the opinion, demonstrate the potential complexity of the arrangements. Donors may need to seek professional advice and charity fundraisers would need to explain how these vehicles would work and so would need training. HMRC would have to deal with tax returns and compliance of these trusts—although that could be helped in part by the point which the noble Lord, Lord Phillips, has just made—as well as make changes to the self-assessment system to allow donors to claim relief.
With these extra burdens, we would want to be sure that additional giving would be generated and that the benefits would outweigh the additional cost. A diversion of giving that might otherwise proceed via gift aid would have an adverse impact on charities. There is also evidence that the existing reliefs for charitable giving are abused and we would want to be very careful that any new reliefs would not be abused. The noble Lord, Lord Best, touched on that point. Certainly, proper oversight of a CRT would be key. The Finance Act 2004 contains anti-avoidance measures that had to be brought in to deal with abuse of the arrangements for gifts of shares to charities. That illustrates the environment that we could be in.
Officials in HMRC and HM Treasury continue to explore the proposals for CRTs in some detail to assess the available evidence. Government will always be interested in exploring ideas which may bring real benefit to charities. With CRTs the evidence is hard to establish, but we are keeping this matter under review as part of the budget process. I was asked specifically about the Government's view on that. I stress that we have made no decision on whether CRTs are appropriate and a good thing, but they are being kept under review. Many of those involved in the Lifetime Legacies Coalition, including the Institute for Philanthropy, which was referred to by the noble and learned Lord, Lord Lyell of Markyate, and the noble Lord, Lord Phillips, and the Institute of Fundraising, have put considerable work into making the case for a tax relief for a charitable remainder trust and I am sure that they will continue to have a very positive dialogue with the Treasury and HMRC.
The reference of the noble Lord, Lord Hodgson, to the Treasury's glacial approach was somewhat unfair. There has been a dialogue, which can continue. In the meantime, there are a number of government initiatives to encourage giving and the use of the existing tax reliefs. In November, the Home Office launched A Generous Society, which contains a range of measures to help government to play their part in meeting the challenge set by the Giving Campaign to double charitable donations in real terms over the next 10 years. This includes a programme to train and support charities in their use of tax-effective giving and extending charitable giving citizenship material to primary schools.
I will seek to deal with one or two other points that were raised. I understand the point made by the noble Baroness, Lady Noakes, that no commitment is made on behalf of the Conservative Party to have this as part of its programme—she said that it is something that its tax commission may consider. However, the point about complexity is real. The noble Lord, Lord Phillips, made a point about accelerating giving. There is no reason why that acceleration could not take place by way of a legacy. The gift does not happen immediately but it does not happen under the trust arrangement in any event.
My Lords, the noble Lord cannot have his cake and eat it. The proposal allows a gift of a major asset now that has impact for tax and charitable purposes now but retains the income of the gift during the lifetime of the donor. That is a strong come-on for generosity now, because it does not cut one loose from the whole asset.
My Lords, I understand that point, but the gift does not reach the charity until the end of the life interest. The same would apply under a legacy. The noble Baroness, Lady Cumberlege, referred to the great deal of work in which she is involved—I pay tribute to that. We recognise that charities need to do a great deal to raise funds. One way in which we can do that is to make sure that the existing reliefs are used to the full and certainly in relation to gift aid, where we have identified that just 30 per cent is taken. That figure could be doubled. Something like £600 million is potentially available to charities because of it. Tax relief is one of the many factors that support a culture of giving and civil society has an important role to play in encouraging those who can afford to give to do so. The noble Lord, Lord May, in particular, spoke about the need to change and move forward the culture in the UK to seek to match that of the US.
I hope that the noble and learned Lord, Lord Lyell, in particular, and all those who have spoken in the debate will not be too disappointed by the response. I hope that they will recognise a shared objective in supporting a strong voluntary and community sector in the most effective way possible. The Government are determined to do all that we can to foster and encourage a deeper, broader culture of giving into the future.
My Lords, I beg to move that the House do now adjourn during pleasure until 8.30 pm.