Until recently, it was the case that gifts to charitable trusts governed outwith the UK were not deemed to be eligible for Inheritance Tax relief in the UK.
However, an appeal case this year saw the UK Supreme Court allow for a gift to a charitable Trust, once governed by the law of Jersey, to qualify for Inheritance Tax (IHT) relief despite the taxman's position being that such relief should be restricted to Trusts governed by UK law only.
What are the tax implications of gifting in Scotland and the rest of the UK?
The legislation setting out Inheritance Tax reliefs is set by Westminster and so the same rules apply across the UK.
Currently these rules allow for a cumulative tax free sum of £3000 to be gifted to Trusts or individuals in each tax year. In addition, small gifts of £250 can be gifted to as many individuals as desired, within the same tax year, although the recipients of a small gift cannot also benefit from any part of the £3000. Also permitted are tax free wedding gifts of up to £5000 to children, £2500 to grandchildren or great grandchildren and £1000 to any other person.
Gifts in excess of the allowances above are known as potentially exempt transfers for the simple reason that if the person making the gift survives for seven years, full exemption will be achieved and the gift is not included in the estate IHT calculation. If the person dies within this seven-year period, they lose the exemption and the gift would be brought into charge. In this circumstance, if tax was chargeable on the gift, taper relief may be available depending on the number of years that has passed since the gift was made.
It is also possible to make a claim for a gift to be treated as a gift out of surplus income as opposed to a gift from capital reserves. To achieve this, detailed records must be maintained to evidence the income, expenditure and surplus income each year. This would allow your Executor to submit an application to HMRC when dealing with your estate.
Where part of an estate is left to charity, that particular portion will be exempt from Inheritance Tax. In situations where at least 10% of the estate is left to charity, the remainder of the estate will be taxed at a reduced rate of 36%.
Free movement of capital between EU member states
In the recent appeal case of Routier v Commissioners for HMRC, the deceased had passed away in Jersey in 2007, leaving the residue of her estate within a Trust for charitable purposes.
The law applicable to the Trust was, at the time, explicitly detailed in the Will to be that of Jersey. The Trustees were also Jersey based.
In 2013, HMRC held that the gift to the charitable Trust did not qualify for Inheritance Tax relief, due to the fact that the Trust had been governed by the law of Jersey at the point of gifting.
HMRC argued that relief should be restricted to Trusts governed by UK law only. A somewhat similar conclusion was reached by the court in the 1956 Dreyfus case, which limited applicability to charitable Trusts governed by UK law.
The executors appealed against this finding, arguing that HMRC's position was contrary to article 56 of the Treaty Establishing the European Community. In general terms, this provision prohibits restrictions on the free movement of capital between EU Member States, and between EU Member States and third countries. The UK Supreme Court held that Jersey was to be viewed as a third country in instances of capital transfer from the United Kingdom. Capital transfer came in the form of the gift to the charitable Trust in Routier, and in line with article 56 therefore, should not have been hindered by restricting the IHT relief available in the UK.
The UK Supreme Court adopted a literal reading of section 23 of the Inheritance Tax Act 1984, finding that on it did not impose any restrictions on the free movement of capital, regardless of whether gifts were made to charities governed by UK Law, the law of other EU Member States, or third countries, such as Jersey.
The court found that the restriction emanating from Dreyfus was not compatible with the prohibitions on restrictions found in article 56 of the Treaty Establishing the European Community. The court held that the gift to the Trust should qualify for Inheritance Tax relief.
It remains to be seen how the Courts would treat a similar situation after Brexit.
Get in touch
Should you have any questions regarding the gifts and Trusts, or other implications of gifting, our Private Client specialists would be happy to help.