14 July 2023
Charitable tax reliefs across the range of UK taxes were restricted to UK charities and community amateur sports clubs (CASCs) with immediate effect from 15 March 2023, with only very few exceptions available under transitional provisions.
Prior to this restriction, European Union (EU) and European Economic Area (EEA) charities and CASCs were generally able to benefit from significant UK tax reliefs. Individual donors were also able to claim UK income tax, capital gains tax (CGT) and inheritance tax (IHT) reliefs on gifts to EU and EEA charities and CASCs, while corporate donors were generally able to claim corporation tax (CT) relief.
This restriction has therefore significantly altered the UK tax landscape for EU and EEA charities and CASCs, as well as for those who donate to them.
Transitional provisions apply to EU and EEA charities and CASCs that asserted their status for charitable tax reliefs prior to 15 March 2023. For these bodies and their donors, the transitional provisions allow for income tax and CGT reliefs to be obtained for gifts made up to 5 April 2024, whereas the other reliefs will be available until 31 March 2024.
Although the transitional provisions may provide breathing room for some EU and EEA charities and CASCs and their donors, it is noted in the policy paper that only approximately 20 EU and EEA charities had asserted their status for UK charitable tax reliefs.
Impact on donors
The immediate implications for individuals intending to make lifetime gifts and charitable legacies following the restriction of tax reliefs are considered below.
Going forward, taxpayers donating to EU and EEA charities and CASCs may wish to reconsider the amount of their donations to adjust for the lack of UK tax reliefs available. Depending on the donor’s point of view, they may wish to gross up their donations to compensate for the fact that the charity will no longer be able to claim Gift Aid, or, alternatively, reduce their donations so that they personally incur the same net cost after tax.
Perhaps the most significant change that may be felt by donors is the withdrawal of IHT reliefs on gifts to EU and EEA charities and CASCs. Previously, these donations have generally been exempt gifts for IHT purposes, meaning that lifetime transfers would not give rise to any IHT. With this relief withdrawn, any such donations will now be chargeable lifetime transfers (CLTs), meaning they may give rise to lifetime IHT liabilities and may also affect the IHT payable on death estates, should the donor die within 14 years of making the donation.
The impact of withdrawal of relief on lifetime donations may be mitigated by the availability of existing lifetime gifting IHT reliefs, such as the annual gift exemption or the relief for normal expenditure out of surplus income. However, no equivalent reliefs apply to charitable legacies in death estates.
Given that IHT reliefs for charitable legacies were specifically introduced to encourage taxpayers to leave significant legacies to charity, the overnight withdrawal of relief for legacies to EU and EEA charities and CASCs may result in a higher-than-expected IHT burden for some taxpayers.
Qualifying charitable legacies in a death estate can impact the amount of IHT payable on the estate in two ways. Firstly, a qualifying charitable gift is an exempt transfer for IHT purposes, meaning that no IHT is suffered on amounts left to qualifying charities and CASCs. Secondly, where more than 10% of the baseline amount for any component of the death estate is left to charity, a reduced 36% IHT rate applies to the remainder of that component of the estate. For this purpose, the estate is divided into three components: those assets passing by survivorship; settled property; and, all other assets and liabilities, including those included in the estate by virtue of the gifts with reservation rules.
Where a will has been drafted to include a specific charitable legacy for an EU or EEA charity or CASC with a value of at least 10% of the baseline estate, or a component of the baseline estate, the additional cost of the withdrawn tax relief will likely be borne by the residuary beneficiaries of the estate.
Affected taxpayers may wish to review their current gifting practices and the contents of their wills as soon as possible, in order to quantify the impact of the withdrawal of these tax reliefs. Advancing planned charitable legacies into lifetime gifts may ensure that the donations benefit from tax reliefs under the transitional provisions in some cases.
Even for donations to charities and CASCs that are not entitled to reliefs under the transitional provisions, the availability of lifetime gifting IHT reliefs may provide an incentive to advance donations.
EU and EEA charities and CASCs should be able to confirm if they meet the criteria for the transitional tax relief period.
For more information, please get in touch with Jackie Hall or your usual RSM contact.