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Wednesday 5th June 2024 Alexander Mahdavi 

Making sure a charitable legacy gets the IHT relief it deserves

Many people leave gifts to charity in their Wills. Not only is this a way of doing a good deed, but government policy encourages such gifts in various ways (with some notable exceptions which I will detail later). First, a gift to a charity in a Will is excluded from Inheritance Tax (IHT) altogether, meaning the gift will not be eroded by tax. Second, if the gift is large enough, it can lead to an overall reduction of the tax rate from 40% down to 36%. There are even some situations where increasing a gift to charity in your Will can lead to such a significant reduction in IHT, that your non-charity beneficiaries receive a larger net inheritance!

However, it is important to understand the limits to this charity exemption. The government decides what is and what is not a charitable recipient for the purposes of this tax relief. Leaving a gift to a UK registered charity would certainly qualify for tax relief, but leaving a sum to your children with the vague instruction to “use this money to do good deeds” would probably not qualify. While the relief is not just available for gifts to registered charities (any institution that has charitable status in the UK for tax purposes would qualify, so this would include many religious institutions and some registered clubs), there are many institutions which a reasonable person might consider a charity, but which may not qualify.

The most obvious category of these are international charities. Up until April of this year, EU charities enjoyed the same tax relief as UK charities for IHT, but the government announced and brought in changes to regulations which now exclude these EU charities. These charities now join those from the rest of the world in not benefitting from IHT relief.

Considering the good work we see many charities doing around the world, this exclusion may seem harsh, but there are some solutions for people who want to leave a legacy to an international charity while getting the tax benefits.

The first potential solution is that many established overseas charities have a UK branch, and these UK branches are almost always UK registered charities, so the gifts to those branches will be tax-free. Even some smaller international charities will establish a UK branch precisely so they can receive donations from the UK with the benefit of tax relief. It is worth checking if a particular international charity you have in mind may already have a little known UK branch.

A second, but more complex, potential solution is to leave a Will legacy to a charity such as the Charities Aid Foundation (CAF), with instructions for how the gift is to be spent. The CAF is a UK registered charity, and part of its work is to verify and accredit international charities, and can help with ensuring the funds get to the intended international recipient, but with the benefits of the charitable IHT relief.

With either of these potential solutions, it is important to review and update your Will to ensure that all the charitable gifts get the intended IHT relief. It is much easier to update a Will than to attempt to restructure an estate after a person has died.

More information about how the Charities Aid Foundation can facilitate international giving can be found here, and for more information about making or updating your Will, please contact Alexander Mahdavi, Head of JPC’s Private Client team, by email amahdavi@jpclaw.co.uk, telephone 0207 625 4424 or connect with him on LinkedIn.


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