Legacies to European charities and IHT exemption post-Brexit

Over the past decade, charities based in the EU, Iceland, Liechtenstein or Norway were able to obtain recognition as a charity for UK tax purposes, including for inheritance tax purposes¹. 

This meant that a legacy from a UK donor to an EU/EEA charity was exempt from UK inheritance tax and, if charitable legacies exceeded 10% of the ‘baseline amount’², the estate could qualify for the reduced rate of UK inheritance tax at 36% rather than 40%. In addition, a beneficiary of a UK will could make a UK inheritance tax-exempt deed of variation to benefit an EU/EEA charity. 

However, 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. Charities already recognised by HMRC have been given a one-year transition period until April 2024.

What does this mean for professional advisers?

If your client has made a will leaving a charitable legacy to an EU/EEA charity in the expectation that this will qualify for UK inheritance tax exemption, you should encourage your client to update their will. Otherwise, the client’s estate may be subject to an unanticipated inheritance tax charge. 

Your client might wish to substitute the EU/EEA charity with a UK charity working in the same field. Alternatively, your client could leave a UK inheritance tax-exempt legacy to our Donor Advised Fund, along with an Expression of Wishes, asking Stewardship to make a grant in support of the EU/EEA charity.

What about legacies to UK charities from EU/EEA donors?

You might think that legacies from EU/EEA donors to UK charities would now be subject to local gift or inheritance taxes in that Member State. However, my experience is that even after Brexit, some EU/EEA tax authorities are still willing to agree favourable tax treatment on a legacy to a UK charity, on the basis that the UK charity is equivalent to a domestic charity in that Member State. It is therefore worth asking the notary administering the EU/EEA estate whether they have considered this point.

¹This followed the European Court of Justice’s decision in Persche (C-318/07) that the principle of free movement of capital prevented Member States from restricting charitable tax reliefs to donations for domestic charities.

² See Inheritance Tax Act 1984, Sch 1A

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This article was first published by Remember a Charity, which represents 200 UK charities and works closely with partners in the legal sector, government and private sector to raise awareness of gifts in wills.  

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