Small Spring Budget change could leave families with a costly surprise
23 May 2023
For more than a decade, individuals making donations to European Union (EU) and European Economic Area (EEA) charities and Community Amateur Sports Clubs (CASCs) have generally been able to claim UK income tax, capital gains tax (CGT) and inheritance tax (IHT) reliefs on the gifts.
In the 2023 Spring Budget, HMRC announced charitable tax reliefs would be restricted to UK charities and CASCs with immediate effect. The change is unlikely to have been anticipated by many taxpayers and those who intended to make such donations should revisit their plans now.
Whilst transitional provisions may apply to donations made to EU/EEA charities and CASCs that had asserted their status for charitable tax reliefs prior to 15 March 2023, we understand that only approximately 20 EU/EEA charities and CASCs had done so by this date.
The restriction of relief may therefore have significant immediate UK tax implications for individuals who intend to donate to EU/EEA charities and/or CASCs, as well as for the charities/CASCs themselves. Companies making qualifying donations to such charities and CASCs that may previously have benefitted from corporation tax relief on those donations may also be affected.
If a charity or CASC had previously asserted its status for UK charitable tax reliefs, income tax and CGT relief can still be obtained on donations up until 5 April 2024, whilst IHT relief (and corporation tax relief) may be claimed on donations until 31 March 2024. Going forward, taxpayers may wish to reconsider their donations to take account of the lack of UK tax reliefs that may apply to donations.
The biggest change that may be felt is the withdrawal of IHT reliefs. Previously, donations to EU/EEA charities and CASCs would have been exempt for IHT purposes, meaning that the transfer would not give rise to any IHT. With this relief withdrawn, any such donations will now be chargeable lifetime transfers (CLTs) for IHT purposes, meaning gifts may incur lifetime IHT charges and additional IHT may also become payable on death, should the donor die within seven years of making a gift.
The withdrawal of IHT relief for donations to EU/EEA charities and CASCs could have significant ramifications for individuals who have included charitable legacies in their wills. Where a will has been drafted to include a specific charitable legacy for an EU/EEA charity or CASC, the additional cost of the withdrawn tax relief will likely be borne by the residuary beneficiaries of the estate.
IHT relief is potentially two-fold for charitable legacies in the death estate. Firstly, as with lifetime gifts, a qualifying charitable gift in the death estate is an exempt transfer for IHT purposes, meaning that no IHT is suffered on amounts left to charity. Secondly, where more than 10% of the baseline amount of any component of the death estate is left to charity, a reduced IHT rate of 36% applies to the remainder of that component of the estate.
It’s difficult to estimate how many taxpayers will be affected by this. Those most likely to be affected are individuals who have settled in the UK from Europe and fall within the UK IHT net. Similarly, UK expats living in Europe may be impacted. Expats can still be subject to IHT in the UK on their worldwide gifts and they may be under the impression a gift to a European charity remains exempt from IHT.
Affected taxpayers may wish to review their wills as soon as possible in order to quantify the impact of the withdrawal of tax relief. Individuals may wish to advance planned charitable legacies into lifetime gifts, which may still be able to benefit from the relevant UK tax reliefs if made prior to 31 March 2024. EU/EEA charities and CASCs should be able to confirm to taxpayers if they meet the criteria for the transitional tax relief period.
In the 2023 Spring Budget, HMRC announced charitable tax reliefs would be restricted to UK charities and CASCs with immediate effect. The change is unlikely to have been anticipated by many taxpayers and those who intended to make such donations should revisit their plans now.
Whilst transitional provisions may apply to donations made to EU/EEA charities and CASCs that had asserted their status for charitable tax reliefs prior to 15 March 2023, we understand that only approximately 20 EU/EEA charities and CASCs had done so by this date.
The restriction of relief may therefore have significant immediate UK tax implications for individuals who intend to donate to EU/EEA charities and/or CASCs, as well as for the charities/CASCs themselves. Companies making qualifying donations to such charities and CASCs that may previously have benefitted from corporation tax relief on those donations may also be affected.
If a charity or CASC had previously asserted its status for UK charitable tax reliefs, income tax and CGT relief can still be obtained on donations up until 5 April 2024, whilst IHT relief (and corporation tax relief) may be claimed on donations until 31 March 2024. Going forward, taxpayers may wish to reconsider their donations to take account of the lack of UK tax reliefs that may apply to donations.
The biggest change that may be felt is the withdrawal of IHT reliefs. Previously, donations to EU/EEA charities and CASCs would have been exempt for IHT purposes, meaning that the transfer would not give rise to any IHT. With this relief withdrawn, any such donations will now be chargeable lifetime transfers (CLTs) for IHT purposes, meaning gifts may incur lifetime IHT charges and additional IHT may also become payable on death, should the donor die within seven years of making a gift.
The withdrawal of IHT relief for donations to EU/EEA charities and CASCs could have significant ramifications for individuals who have included charitable legacies in their wills. Where a will has been drafted to include a specific charitable legacy for an EU/EEA charity or CASC, the additional cost of the withdrawn tax relief will likely be borne by the residuary beneficiaries of the estate.
IHT relief is potentially two-fold for charitable legacies in the death estate. Firstly, as with lifetime gifts, a qualifying charitable gift in the death estate is an exempt transfer for IHT purposes, meaning that no IHT is suffered on amounts left to charity. Secondly, where more than 10% of the baseline amount of any component of the death estate is left to charity, a reduced IHT rate of 36% applies to the remainder of that component of the estate.
It’s difficult to estimate how many taxpayers will be affected by this. Those most likely to be affected are individuals who have settled in the UK from Europe and fall within the UK IHT net. Similarly, UK expats living in Europe may be impacted. Expats can still be subject to IHT in the UK on their worldwide gifts and they may be under the impression a gift to a European charity remains exempt from IHT.
Affected taxpayers may wish to review their wills as soon as possible in order to quantify the impact of the withdrawal of tax relief. Individuals may wish to advance planned charitable legacies into lifetime gifts, which may still be able to benefit from the relevant UK tax reliefs if made prior to 31 March 2024. EU/EEA charities and CASCs should be able to confirm to taxpayers if they meet the criteria for the transitional tax relief period.
Matthew Todd
Associate Director
AUTHOR
Matthew Todd
Associate Director