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.
