Over the last few weeks, HMRC has begun writing letters to individuals who made donations during the EU referendum campaign, ‘inviting’ them to pay inheritance tax (IHT) at 20 per cent on their gift. This immediately led to conspiracy theories about civil servants angry at the outcome of the referendum seeking to punish Brexit supporters. However, on this occasion the facts got in the way of a good story as it became clear that HMRC is targeting supporters of both the leave and remain campaigns.
So what’s actually going on? It’s safe to say that a potential tax liability was not in the minds of individuals providing financial support to campaigning organisations, but should it have been? And why IHT, of all things?
The starting point when considering these questions is the fact that inheritance tax is wrongly named. It leads to the assumption that someone must have died for the tax to become due, which is not the case at all.
IHT is actually payable whenever an individual makes a gift, unless an exemption applies. Gifts to another individual will be exempt from IHT if the donor survives them by seven years, and some other gifts are exempt immediately, but this is not automatically the case.
Exemptions and reliefs
Firstly, there is a range of outdated, and relatively small, reliefs available. Up to £3,000 can be gifted each year to anyone, up to £5,000 on a child’s marriage, £250 per year in total for small gifts, and so on. Then there is the nil rate band, which has remained at £325,000 since 2009: to simplify somewhat, gifts of up to this amount made within seven years of your death are taxed at zero per cent.
Beyond this, any gift is potentially taxable, even if it is made during your lifetime and no-one has died: it mainly depends who has received it.
Gifts to an organisation, company or trust generally require a specific exemption. For example, gifts to charities or political parties, as defined, are specifically exempted.
Potentially more generous than any of these reliefs is the exemption for normal gifts out of excess income. In essence, if you regularly receive more income than you need to live from, gifts of the excess can be immediately free from IHT if correctly structured. This relief needs to be considered carefully, but for anyone who regularly makes gifts of any sort it can be very valuable.
Other gifts can result in an immediate charge to IHT at 20 per cent, and this is the problem for referendum campaign donations. Organisations supporting both leave and remain do not qualify as charities because they are political, and HMRC does not consider them to be political parties because IHT legislation requires political parties to have sitting MPs elected at the last general election.
Our advice to anyone who receives an HMRC letter about donations is not to ignore it, but also not to assume that it is correct – take advice before acting. The same goes when considering donations generally if you are not sure the status of the recipient. Otherwise you risk getting a nasty surprise in the future when the tax man asks for his share.