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I recently met a lady while she was out walking her dog — a three-legged rescue animal from Romania. A strong believer in animal rights, she told me she planned to leave part of her estate to animal rescue charities in Cyprus, Greece and Romania.
What she had not counted on, however, was the UK government’s measures on tax relief for charities, which came into force this year. Gifts to any charity in the EU or European Economic Area no longer qualify for a relief commonly granted to UK charities — and leaves these overseas institutions facing a drop in funding.
It is a change that may come as a surprise to others planning to include gifts in their wills to EU-based charities.
A growing number of estates are now subject to inheritance tax (IHT), after the government declined to update the so-called “nil rate band” beneath which no IHT is payable. Set in 2009 at £325,000, this threshold has been frozen for 14 years, while inflation, rising stock markets and house price growth have driven up the value of assets. More people pay IHT and more money is going to the Treasury.
The growth in IHT has a direct impact on charities. If a person leaves their estate to their spouse or civil partner, a charity or a registered community amateur sports club (CASC) in most cases there will be no IHT payable. And if an individual leaves 10 per cent of their net estate (the estate’s total value minus any debts) to charity, the estate can qualify for a reduced IHT rate of 36 per cent — down from the current IHT rate of 40 per cent.
In the Spring Budget, however, chancellor Jeremy Hunt announced a restriction of charitable reliefs to UK charities. The new definition meant that only those charities within the jurisdiction of the High Court in England, Wales or Northern Ireland or the Court of Session in Scotland, will qualify for UK charitable tax reliefs. Charities based in the EU are left out in the cold.
Consider the case of an unmarried individual without children, who has an estate worth £825,000. Her will includes £50,000 in legacies to UK charities — for example, £5,000 to 10 charities. The first £325,000 would be tax free as it falls within the nil-rate band; £50,000 would also be tax-free as it benefits from the charity exemption. The amount left to charity would allow the remaining £450,000 to qualify for a reduced IHT rate at 36 per cent, which means the IHT payable will be £162,000.
If one of her chosen charities was based in the EU — say, she gifted £5,000 to a children’s charity in Romania — only £45,000 of legacies would be paid to UK-based charities. Since this is less than 10 per cent of her total estate, this estate would no longer qualify for the reduced IHT rate. As a result, the remaining £455,000 will be subject to the full IHT rate of 40 per cent. The IHT payable would be £182,000 — or £20,000 more.
The political attractions of the measure are clear. The Treasury saves money at a time of national hardship. Reserving a relief for UK charities carries a patriotic appeal. Can we even be certain that overseas charities are really charities at all?
The change took effect on March 15, with transitional relief available until April 2024 for those charities that assert UK charitable status. From then, non-UK charities will no longer be eligible to claim UK charitable tax reliefs. If charitable donations in your current will allow your estate to secure a reduced IHT rate — but those donations include gifts to EU charities — it may be worth reviewing your will. The tax consequences could be substantial.
One way to alleviate the potential additional IHT being paid by UK donors is to consider gifting to the UK branches of charities with a wider EU reach. Whether the funds would be used in the country or in the manner which the donor had specified remains at the discretion of the charity trustees, but donors can prepare a letter or an expression of wishes suggesting where they wish their monies to be spent.
In its policy paper ahead of the change, the government said the measure would have a negligible impact, affecting only about 5,000 businesses and 20 EU charities. The document provided no detail on the calculation or source of these estimates.
The harsher effects are likely to be felt in small overseas charities set up to reduce suffering. The policy on IHT relief drives a legal wedge between UK charities and their EU counterparts and hinders co-operation on matters including human rights, wildlife protection and famine relief. It is time for ministers to think again.
Catalina Lowe is a senior associate specialising in succession and estate planning at law firm DMH Stallard
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