Brexit - Will It Affect the Inheritance Tax Treatment of Legacies to EU-Based Charities?

We are all aware that this may affect our freedom of movement and trade with the EU, but what about the EU principle of freedom of movement of capital in the context of charitable giving?  What will the post-Brexit impact be for gifts made to EU Charities under Wills prepared in England and Wales?

Gifts generally attract Inheritance Tax (IHT), whether the gift is made in a person's lifetime or under their Will.  However, under section 23 Inheritance Act 1984, a gift made to a charity on death will benefit from a 100% IHT exemption.

In addition, should a testator leave 10% of their net estate to qualifying charities, their estate will be eligible for the 36% reduced rate of IHT as opposed to the standard rate of 40%.  This can provide significant IHT savings.  Gifts to charities can be used as part of estate planning.  Since April 2012 (following the Finance Act 2010), UK charitable reliefs have also applied to gifts made to charities established in the EU (and Norway and Iceland).

For an organisation to qualify as a charity it must fall within the definitions provided for in the Charities Act 2011 and the Finance Act 2010, as interpreted by the English courts.

To qualify as a charity in the UK for tax purposes the organisation:

• must be established for a charitable purpose: statutory guidance has been provided and is broadly interpreted by the English courts.
• must be subject to the control charity law jurisdiction of the High Court; this means that only charities governed by UK law can qualify for the IHT charity exemptions.  The  decision in October 2019 in the Appeal Court case of Routier v HMRC reinforced the position that HMRC is entitled to refuse to grant relief on gifts to non-UK charities unless there is a "mutual assistance agreement" between the UK and the country in which the charity is based. 

Post-Brexit

As identified in Routier, it is jurisdictional governance that poses a problem for charities located outside the UK. After the transition period, will the UK still have in place what the English Courts consider to be a "mutual assistance agreement" with the EU Member States?  The position is currently uncertain.

While gifts can still be made to EU charities, it is possible that they will no longer benefit from the UK IHT exemption, although, at the date of writing no legislative changes in relation to this point have been made. To avoid the scrutiny of HMRC and to provide more certainty on the tax position of an estate, a testator can prepare their Will to include a legacy to a qualifying UK charity that has links to an intended EU charity.   

Existing Wills should be reviewed in light of the potential IHT consequences on gifts made to EU charities following Brexit.

For more information on giving to charity in your Will, please contact a member of our Private Client team, or complete the form below.