At first glance it appeared that inheritance tax (IHT) emerged relatively unscathed from the 2023 Spring Budget. Certainly, none of the headline measures dealt directly with everybody’s favourite death tax. However, you need dig only a little below the surface to realise that the Chancellor materially reduced the international scope of a much-loved IHT relief: the IHT charitable exemption.
Testators are increasingly choosing to leave gifts to charities in their Wills. The value of these legacies, both to the charities themselves and to society at large, has been recognised by HMRC through the availability of certain IHT reliefs. Prior to the Spring Budget, the position was that a testamentary legacy to a UK charity, or to an equivalent organisation in the EU, Norway, Iceland or Lichtenstein (referred to here as EEA Charities), was exempt from IHT. In addition to that, where a testator left broadly 10% or more of their net estate to qualifying charities, their entire chargeable estate would benefit from a reduced rate of IHT, dropping from 40% to 36%.
The Finance No (2) Bill 2022-23 will change the definition of 'charity' so that only a charitable body subject to the jurisdiction of 'a relevant UK court' (such as the High Court in England, Wales or Northern Ireland and the Court of Session in Scotland) will be considered a charity for tax purposes. As EEA Charities typically do not meet this jurisdiction requirement, they will fall outside of the definition of 'charity' and will therefore cease to be eligible for UK charity tax reliefs. This change is not wholly unexpected: the restriction of charity tax reliefs to UK charities has been anticipated since Brexit.
The result is that from 15 March 2023, testamentary legacies to EEA Charities will no longer be eligible for the IHT charitable exemption and will also not count towards the proportion of an estate that has been left to charity. In other words, only legacies to UK charities will benefit from the IHT charitable exemption. There is a transitional period for the 20 or so EEA Charities that are already registered with HMRC for charity tax reliefs: testamentary legacies to these organisations will instead cease qualifying as transfers to a charity on 1 April 2024.
The change in the rules complicates the IHT position for those testators who wish to leave a gift to an EEA charity in their Will. However, it does not close the door on their estate being able to claim the IHT charitable relief on legacies ultimately intended to support EEA charities. For example, many overseas charities have close relationships with UK charities that make grants to support their work (these are often known as 'Friends of...' charities). Another option might be for a testator to leave a legacy to a 'Donor Advised Fund' with instructions that it should be used to support the charitable purposes carried out by an overseas charity. In the UK, Donor Advised Funds are typically established by UK registered charities and so testamentary legacies to these entities will continue to attract the IHT charitable exemption.
There are therefore two main takeaways.
Firstly, it remains possible for the IHT charitable exemption to be claimed on a legacy that ultimately benefits a charitable organisation based in the EEA (or elsewhere in the world), providing the gift is made by way of a UK registered charity.
Secondly, a word of warning for those individuals whose Wills currently leave legacies outright to EEA charities. These legacies will no longer attract the IHT charitable exemption. It might be time to review your Will.
If you have any questions about leaving legacies to charitable organisations as part of your estate planning, or if you require advice about philanthropic giving during your lifetime, please do get in touch.