Charity begins abroad: offshore charities and UK tax reliefs

Mon 06 Oct 2014

The case of Routier and Venables v HMRC concerned a bequest to charity under the will of C and possible relief from inheritance tax (IHT) under IHTA 1984 s 23.

C’s will left money to a charity constituted in Jersey and subject to Jersey law and the executors claimed that this was exempt from IHT under s 23 as a transfer to a charity. HMRC claimed that s 23 only applied to charities constituted in or otherwise subject to UK charity law because, at that time, there was no formal definition of “charity” in UK tax law and so the word had to take its ordinary meaning in UK law. For a body to be a charity under UK law it had to be UK-resident or otherwise subject to UK law but the Jersey charity was specifically constituted under and subject to Jersey law. Therefore the High Court ruled that the transfer was not exempted by s 23.

Changes to definition of charity in FA 2010

FA 2010 Sch. 6 introduced a definition of “charity” for UK tax purposes. The new definition came into effect in two stages:

·         for Gift Aid, on 6 April 2010; and

·         for all other purposes, including IHT exemption, from 6 April 2012.

Conditions for recognition by HMRC

A body is only recognised as a charity if it:

·         is a charity under the law of England and Wales, or would be, if it was established in England and Wales;

·         is located in the UK, another EU Member State, or a country designated under the Taxes (Definition of Charity) (Relevant Territories) Regulations 2010 (SI 2010/1904), currently Iceland, Norway and Liechtenstein;

·         is registered by the Charity Commission where required (some small charities are exempt from registration) or by a regulator equivalent to the Charity Commission in their home country if the law of the home country requires; and

·         meets the “management condition” which principally applies a “fit and proper persons test to the people involved with the charity’s finances.

Any body that is not recognised by HMRC cannot claim gift aid.

Charitable gifts made between 27 January 2009 and 5 April 2012

The change in law was made because the UK’s restriction to UK charities was found to be illegal following the ECJ decision in the case of Hein Persche v Finanzamt Ludenscheid which determined that a territorial restriction on a charity exemption breaches EU law.

Therefore HMRC accepts that any transfer to a charity established in the EU made on or after 27 January 2009 is eligible for relief in the same way as if it were made to a UK charity.  Transfers to clubs established in the EU which are registered as Community Amateur Sports clubs also attract relief, provided the club meets certain conditions.