Charitable giving in Wills: charity must be governed by UK law to secure IHT exemption


Author: Helena Luckhurst


This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

The UK Inheritance Tax (IHT) saving is probably the last reason why anyone would deliberately choose to leave assets to charity in their Will.  However, it is the case that leaving assets to charity is very IHT efficient, for two key reasons.  Qualifying gifts are 100% IHT exempt – the charity will not have any IHT deducted from what is left to them.  In addition, from April 2012, the estate of anyone leaving at least 10% of their net estate to charity benefits from a reduced IHT rate of 36%.  The recent Court of Appeal case of Routier & Anor v HMRC ([2016] EWCA Civ 938) is a reminder, though, that, where the Will contains a foreign element, it is dangerous to assume that the IHT charity exemption will be automatic.

Although Beryl Coulter was domiciled in Jersey on her death, she had over £1,800,000 worth of her assets in the UK. UK situated assets held by non-doms are subject to IHT.  Mrs Coulter left these assets, and others, to a trust in her Will whose purpose was to construct homes for elderly residents of a Jersey parish, or in default to Jersey Hospice Care.  The trust was governed by Jersey law.  The executors applied for IHT exemption on the basis that the funds were being held on a trust for charitable purposes only.

The Court of Appeal upheld the lower court’s decision that the will trust was not entitled to any IHT exemption. It was not in dispute that the will trust’s purposes were charitable as a matter of English law and that it did not matter that the purposes were to be carried out outside the UK.  However, the problem was that past case law had construed tax legislation to mean that, for an outright gift to charity to benefit from the IHT exemption, the charity had to be governed by some part of the UK and to be subject to the jurisdiction of the UK courts.  The novel point in this case was that the funds were left to a charitable trust, rather than to a named charity outright, so was the law different?  It was held that there should be no distinction.  The court was of the view that it would be ‘incongruous’ for a UK court to have to determine whether the purposes of a charity governed by a foreign law (and thus subject to a foreign court) were charitable purposes as a matter of UK law.  As the trust was governed by Jersey law, the IHT exemption was not available.

Accordingly, if a Will creates a charitable trust, it must be governed by UK law as one of the preconditions to securing the IHT charity exemption. It is worth noting that Mrs Coulter would have achieved this outcome if she had made a UK Will to deal with her UK assets and whose terms, including any trusts, were expressed to be governed by English law.  This case tends to support the general rule of thumb that non-doms should make UK Wills to deal with their UK situated assets.

However, the appeal is not over yet, as the court is to review whether the ruling breaches EU legislation requiring free movement of capital between Member States and third countries.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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