Changes to charitable giving for Income tax and Inheritance Tax

Following announcements from the Chancellor in his Spring Budget (March 2023), changes have been made to the definition of a charity and a Community Amateur Sports Club (CASC). The result being that individuals (or corporate donors) making donations to charities situated in the European Union (EU) or European Economic Area (EEA) will no longer qualify for UK tax reliefs.

The change is effective from 15 March 2023, with transitional relief available until April 2024 for those charities who had asserted their UK charitable status by 15 March 2023.

To illustrate the impact, if an individual were to make a £10,000 charitable donation to a charity that is no longer qualifying, the charity will be unable to claim back the 25p per £1 (£2,500 for a £10,000 donation) and the individual can no longer claim back the higher rate or additional rate tax relief.

For a higher rate taxpayer donating £10,000 with a marginal rate of tax of 40%, there would be a loss of tax relief amounting to £2,500 and for an additional rate taxpayer paying tax at 45%, this would be £3,125.

The change to the definition of a charity or CASC will also impact those who expect to receive Inheritance Tax (IHT) exemption on any lifetime gifts or legacies on death.  At present, those who leave at least 10% of their net estate to charity will receive a 36% reduced rate of IHT. If one or more of the charities stated in the Will were to now fail to meet the definition of a charity, the 10% condition may also fail. The IHT impact could be significant.

If an individual has a chargeable estate worth £975,000 with no reliefs available (such as BPR) and £65,000 was left to a qualifying UK charity, the IHT would equate £210,600. The £65,000 would be exempt and £325,000 would fall within the nil rate band, with the remaining estate (£585,000) chargeable at 36%.

Following the introduction of the new legislation, if £65,000 worth of donations are made, of which £6,000 are to a non-qualifying EEA/EU charity (thus failing the new definition of a charity), only £59,000 of the donations (to UK based charities) would qualify and the IHT would equate to £236,400. Effectively, the rate of tax on the £591,000 net estate would increase from 36% to 40%, which results in additional tax exposure of £25,800.

If you have any legacies in your Will to EU or EEA charities and anticipate that you will be entitled to the reduce rate of IHT then please review your Will immediately.

Surprisingly, The Government anticipates that this legislative change will only impact around 2,000 taxpayers and 20 charities but nevertheless, where the donations are large, the tax effects could be significant.

If you need any assistance with these matters, our award-winning tax team that can help with tax planning and our private client team can help with Wills. Click here to contact us.

Author: Meg King