The Brexit pitfall for UK inheritance tax reliefs and charitable tax exemptions

Since the UK withdrawal from the EU on 31 January 2020, it became clear the UK would be making significant policy changes, eventually amending its tax relief policies.

The chancellor announced in the Spring Budget 2023 that EU and EEA charities would no longer be eligible for recognition as a charity for UK tax purposes. This means that a legacy left to a European charity by a UK national will not be exempt from inheritance tax and a legacy to a UK charity by a European national may now be subject to foreign taxes because UK charities can no longer benefit from charitable tax exemptions at a European level. With more and more people leaving their estates to charitable organisations, the reduction of the scope of this relief will have a far reaching effect. 

Pre-Brexit charity legacies 

According to section 23 of the Inheritance Act 1984, gifts to charities on death benefit from a 100% inheritance tax exemption. What’s more, if more than 10% of a person’s estate is left to a qualifying charity, the estate will be eligible for a reduced rate of inheritance tax (36% in place of the standard rate of 40% inheritance tax) on non-exempt assets. The Finance Act 2010 established in April 2012 that UK reliefs for charities also apply to charities in the EU, Iceland and Norway. 

What is a qualifying charity?

The English courts are guided by the Charities Act 2011 and the Finance Act 2010 in defining a qualifying charity as follows:

1. established for a charitable purpose in line with statutory guidance
2. subject to and governed by UK law

Post-Brexit charity legacies

The Finance No (2) Bill 2022-23 requires a charitable body to be subject to the jurisdiction of 'a relevant UK court' in order to qualify as a charity for tax purposes. Not only do gifts to EEA charities no longer qualify for the inheritance tax charitable exemption, they will also not count towards the share of the estate left to charity.  This could leave the estate falling short of qualifying for a 36% reduced rate of inheritance tax liability that comes with leaving more than 10% of the estate to charity. 

How can we help?

Including a gift in your will to a qualifying UK charity that is in the same field, or has links to, an EU charity could be a helpful tool for those who wish to leave a legacy to a charity that is not a qualifying charity post-Brexit. Equally, for those who have a will, reviewing your existing will to consider the inheritance tax consequences on gifts to EU charities will give you peace of mind that your wishes can be respected. 

Russell-Cooke offers cross-border specialists, complete with a dedicated French team, who can provide much needed guidance and expertise in this area including estate planning, will drafting and estate administration, and help you steer clear of this post-Brexit pitfall.