There is an unlimited exemption from IHT for any property left by a deceased person to a UK charity or a recognised UK political party. Usually there is no ambiguity about either of these as they are matters of fact. However, it is worth noting what the definitions of charities and political parties are for IHT purposes and ensuring that the exemption is not compromised in any way.
For the UK charities exemption to apply, there are 2 main conditions that must be met:
a) the charity must have the required charitable status; and
b) the gift must be genuinely charitable and used only for charitable or other exempt purposes
With regard to the second condition, the word charitable must be taken in its strict legal sense. A gift to a needy individual is not covered by the exemption even if made with charitable intent. Likewise, a gift for benevolent purposes such as school fees would not qualify although it may well be covered by the exemption for family maintenance. However, it would have to be reasonable for the childs needs.
It is often thought that a charity must be registered under the Charities Act 1993 in order to qualify for IHT exemption, but that is not necessarily true. Registration under the Act does raise a conclusive presumption that an institution is a charity at any time it is on the register, but not all charities have to be registered under the Act, so a body that is not registered may nevertheless still be a charity for IHT purposes. However, in that situation its status would be decided by the Courts, the Charities Commission or HMRC Charities.
Community Amateur Sports Clubs are generally covered by the charities exemption. Provided that a sports club is registered as a CASC, it is possible for HMRC to allow the exemption unless the gift is not wholly used by either the sports club itself, another sports club that is registered as a CASC, the governing body of an eligible sport or for the purposes of a charity.
Gifts of land in the United Kingdom to Registered Housing Associations, including any buildings attached to the land, also have an unlimited exemption. Technically this is not actually the charities exemption although it is applied in a similar way. Since 1996, these bodies have been known as Registered Social Landlords in England & Wales.
There are many other bodies where the charities exemption may be allowed provided that a) they are based in the UK and b) the gift is straightforward (for example, it is not expressed to be for a specific purpose). There is also a third condition which the public are not allowed to know as it is withheld due to exemptions in the Freedom of Information Act! These bodies are shown on the HMRC website under 4 categories. Category 1 is for religious bodies such as cathedrals, churches, missionary societies and Sunday Schools. Category 2 is for welfare organisations such as orphanages, community centres, convalescent homes and mentally or physically handicapped groups. Category 3 relates to health bodies such as hospitals, nursing associations and medical research funds. Category 4 is any branch of an organisation which is governed by a Royal Charter such as the Boy Scouts, Girl Guides and British Red Cross.
However, there are several other organisations where it is doubtful if the charities exemption would apply. These include musical or dramatic societies, industrial welfare societies, trade associations and civic societies. A full list of these can be seen on the HMRC website. These bodies are not automatically excluded but any gift would have to be given careful consideration in order to establish the correct IHT treatment.
Normally the beneficiary would need to have charitable status at the time the property was transferred in order to qualify for exemption. However, it is possible to backdate charitable status if the beneficiary had already applied to register with the Charities Commission as a result of the legacy or if the will created a charitable trust. It is also possible to confer charitable status on a gift at a later date by making an instrument of variation or a qualifying distribution from a discretionary trust.
Sometimes, the intended beneficiary may not be clear from the terms of a will. For example, it may refer to cancer research, handicapped children, conservation or animal welfare. In such cases, it will be necessary to use the Royal Sign manual procedure in order to obtain the charities exemption. This enables the Attorney-General (on behalf of the Queen) to exercise the Royal Prerogative to direct that the bequest be made to a particular charity representing the testators wishes. For example, in the case of cancer research the Treasury Solicitors Department, who administer the scheme, has established a rota by which certain charities receive approximately the same amount in any given year. The Revenue will then comply with any direction made under this procedure to allow the charities exemption.
The charities exemption can never be allowed for bequests to a foreign body, so it is necessary to ensure that gifts are made to a UK charity in order for it to apply. For example, bequests to Amnesty International must be made specifically to the British Section Charitable Trust. It does not matter if a gift is made to a UK charity such as Oxfam whose primary purpose is, for example, the relief of poverty abroad. The gift will be exempt even if its stated purpose is for charitable work in another country. On the other hand, a gift made to Mother Theresa in 1992 failed to qualify for the exemption because it was made directly to her rather than to one of the UK charities that supported her work.
A gift to a political party qualifies for exemption if, at the last General Election preceding the transfer of the property, either a) 2 members of that party were elected to the House of Commons, or b) one member was so elected and at least 150,000 votes were given to candidates who were members of that party. The current list of qualifying political parties is as follows:
- Liberal Democrats
- Ulster Unionists Party
- Social Democratic and Labour
- Scottish National Party
- Democratic Unionists Party
- Plaid Cymru
The gift must become the property of the political party itself in order to be exempt. This may not always be the case where gifts are made to a local association or to another body connected with a political party. The gift must also be absolute and not subject to any conditions specifying how it should be used. Such a condition may create an express trust which would invalidate the exemption.
For both charities and political parties, there are certain situations where a gift may result in the exemption being disallowed. These relate to the following circumstances:
|the gift is not wholly for charitable or other exempt purposes
the gift is potentially defeasible (ie it may be prevented by a future event)
the gift is postponed (ie it only takes effect upon the termination of an interest or period of time)
the gift is conditional (ie the gift is subject to some condition that cannot be satisfied with 12 months)
the gift is only for a limited period, after which it reverts to another beneficiary who is not wholly exempt
the gift is less than the testators full interest (eg if he/she owned a freehold but only granted the beneficiary a leasehold in his/her will)
||a gift is subject to an interest in possession (eg a building occupied by children of the deceased at less than a market value rent)
In all cases that are less than straightforward, it is important to ensure that wills do not contain terms that may unnecessarily invalidate the exemption. Come and speak to us at Acumen if you are in any doubt.