Legacies to European charities and the IHT exemption post-Brexit
Over the past decade, charities based in the EU, Iceland, Liechtenstein or Norway were able to obtain recognition as a charity for UK tax purposes, including for inheritance tax purposes. This meant that a legacy from a UK donor to an EU/EEA charity was exempt from UK inheritance tax and, if charitable legacies exceeded 10% of the ‘baseline amount’, the estate could qualify for the reduced rate of UK inheritance tax at 36% rather than 40%. In addition, a beneficiary of a UK Will could make a UK inheritance tax-exempt deed of variation to benefit an EU/EEA charity.
However, the Chancellor announced in the Spring Budget that EU and EEA charities would no longer be eligible for recognition as a charity for UK tax purposes. Charities already recognised by HMRC have been given a one-year transition period until April 2024.
What does this mean for professional advisers?
If your client has made a Will leaving a charitable legacy to an EU/EEA charity in the expectation that this will qualify for UK inheritance tax exemption, you should encourage your client to update their Will. Otherwise, the client’s estate may be subject to an unanticipated inheritance tax charge.
Your client might wish to substitute the EU/EEA charity with a UK charity working in the same field. Alternatively, your client could leave a UK inheritance tax-exempt legacy to a UK donor advised fund such as Stewardship, along with a letter of wishes asking the donor advised fund to make a grant in support of the EU/EEA charity.
What about legacies to UK charities from EU/EEA donors?
You might think that legacies from EU/EEA donors to UK charities would now be subject to local gift or inheritance taxes in that Member State. However, this author’s experience is that even after Brexit, some EU/EEA tax authorities are still willing to agree favourable tax treatment on a legacy to a UK charity, on the basis that the UK charity is equivalent to a domestic charity in that Member State. It is therefore worth asking the notary administering the EU/EEA estate whether they have considered this point.
Rachel Steeden is an experienced private client lawyer now working as part of Stewardship’s Philanthropy Services Team to help (U)HNW donors make effective and tax-efficient gifts.