Financial worries increase for charity sector

An increasing number of UK charities are facing significant financial issues, spurred on by so-called ‘cessation debts’ – which may require some charities to pay six-figure sums in defined-benefit pension schemes.

The fears are a double blow for some charities, following recent changes Inheritance Tax (IHT) legislation, which could affect legacy donations.

In April this year, the Department for Work and Pensions (DWP) proposed an amendment to pension regulations following mounting fears that a number of charities are facing financial difficulties due to their onerous defined-benefit pension scheme arrangements – which struggling charities believe have become unsustainable and unaffordable.

The DWP’s move came after the Charity Finance Group (CFG) issued a warning that defined benefit pension schemes were leaving many charities in a “catch-22 [situation] where they can neither afford to exit a multi-employer scheme, nor to remain in the scheme”.

The Government is currently consulting on the proposed changes to the legislation, which, in its existing form, has been described by the CFG as a “ticking time-bomb” for already-struggling charities.

At the other end of the spectrum, not-for-profit bodies such as Remember a Charity have voiced concerns that charitable donations in the form of legacy giving will be hit hard by recent changes to Inheritance Tax.

The organisation claims that legacy giving has increased by 39 per cent in the last five years and that, on average, eight per cent of UK estates now leave behind donations of around £20,000 each. However, it estimates many estates will stray away from donations in favour of the new Residence Nil Rate Band (RNRB) allowance. This allowance, introduced last month, enables people who leave their home to direct lineal descendants to tap into an additional tax-free IHT allowance of £100,000.

Remember a Charity warns that “fewer people will be aware of their charitable options” as solicitors push the new RNRB. As a result, many weary charities – already struggling with costly pension woes and other financial fears – could miss out on approximately £24m in incoming donations.

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