Budget 2025: What it means for legacies
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On the face of it, the Chancellor’s Autumn Budget 2025 brought little news for charities. But, digging a little deeper into yesterday's announcements, the Finance Bill 2025-26 and accompanying documents, there are a few changes that could have quite a bearing on charities that rely on legacy income.
Here we round-up three key areas of change and share some suggestions of next steps for charities, covering:
- IHT thresholds - the evolving fiscal landscape
- Charity compliance measures for charitable tax reliefs
- Reducing the burden for Personal Representatives
Evolving fiscal landscape
Inheritance Tax (IHT) thresholds will remain static at £325,000 for the nil-rate band (NRB) and £175,000 for the residence nil-rate band (RNRB), with the taper threshold continuing at £2 million for the next few years. However, the Chancellor announced that these thresholds would now be frozen to 2031 – a one-year extension on last year’s budget announcement.
This means that the combined allowance for a couple can still reach £1 million if both bands are fully used, but due to fiscal drag and incoming measures like pension wealth coming into the scope of IHT from April 2027, the proportion of estates facing a tax bill is expected to double within the next few years. This makes the generous charitable tax incentives on legacy giving* even more relevant and more attractive to more people, supporting further legacy growth.
Supporters can donate unused pension funds through a charity lump sum death benefit and these gifts will continue to qualify for IHT relief. However, this only applies for donors without dependants. So, at Remember A Charity, we will continue to stress to Government the need to make it easier for people to donate in this way.
Lucinda Frostick, Director of Remember A Charity, says: “It’s a great relief to see that the tax incentives on charitable legacies have been protected. These incentives remain vital when it comes to growing and normalising legacy giving across the UK. But, with pensions coming into the scope for IHT shortly, we continue to urge Government to address the barriers that make it impossible for many people to donate tax-free in this way.”
*Charitable legacy donations are free of IHT and donations of 10% or more of the taxable estate reduce the IHT rate from 40% to 36%.
Read more in our write-up from our roundtable event earlier this year.
Strengthening Charity Tax Compliance
As proposed in draft legislation, Government will be tightening the rules around charitable tax reliefs to reinforce transparency and ensure donations are used as intended. Key changes include the testing criteria for tainted donations, requirements for approved charitable investments, and legacy gifts being treated as attributable income.
From April 2026, legacies received by charities will be treated as ‘attributable income’, meaning they must be used for charitable purposes or risk a tax charge from HMRC. Government stresses that this new rule aims to bring legacies into line with other income streams, with the purpose of strengthening trust, and safeguarding use of the charitable tax reliefs. HMRC has committed to help the sector understand and prepare for the change with clear communications and guidance.
The tainted charity donations rules aim to prevent abuse of tax reliefs, where a donor might give, but receive a financial benefit in return. If a donation is deemed “tainted,” the donor loses any associated tax relief. The new tainted donation test shifts the focus from donor intent to outcome, meaning HMRC will look at whether the donor actually receives a benefit, not just whether that was their purpose. Government will be lowering the bar for establishing whether a transaction is tainted by replacing the test of ‘financial advantage’ with ‘financial assistance’.
When it comes to approved charitable investments, new rules mean that all 12 investment categories will be subject to the same to the same requirements – namely that investment must be made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person).
In our submissions to Government and the House of Lords Sub-Committee earlier this year, Remember A Charity and the Chartered Institute of Fundraising stressed the importance that charities would be given further clarity about what these new rules mean in practice and how to ensure compliance, so we’re pleased to see Government’s commitment to do so. HM Treasury has responded to concerns we raised earlier this year, clarifying that charities will not be required to spend funds from gifts in Wills within any set timeframe.
Reducing the burden for Personal Representatives
In news that is warmly welcomed, Government has announced new features of the process for IHT to support Personal Representatives (PRs) to effectively administer estates containing pensions (applying from April 2027).
If PRs reasonably expect IHT to be due, they can direct Pension Scheme Administrators (PSAs) to withhold 50% of the taxable benefits for up to 15 months from the date of death. PRs can then direct PSAs to pay the IHT due to HMRC before releasing the rest of those benefits to pension beneficiaries. PRs will also be discharged from liability for pensions discovered after they have received clearance from HMRC.
Remember A Charity and the Institute of Legacy Management (ILM) warmly welcome this change, and the measures taken to recognise and reduce the burden facing PRs.
Matthew Lagden, CEO of the ILM, says: "We are very pleased that our views on this topic have been taken on board, as it significantly reduces the chances of delays in the Probate System once the new regime comes into effect. This has been a joint effort with stakeholders from across the probate system and Remember A Charity, and a testament to what can be achieved when we work together.”
What Should Charities Do Now?
While these changes all relate to future and incoming legislation, now is the time to prepare and we encourage charities to:
· Review the Budget announcement and accompanying documents here, considering any implications for your current governance and financial controls.
· Update any internal policies and trustee guidance to reflect the new compliance requirements.
· Review how legacy funds are documented, making it easier to demonstrate how such income is used.