More paperwork for charities from April

Many column inches have been devoted to the Government's change to the inheritance tax (IHT) legislation giving a reduced rate of IHT to the estate of those people who leave at least 10% of their net estate to charity.  This change is due to come into force for deaths on or after 6 April 2012.  Only time will tell whether this change will have the desired effect of encouraging more people to leave part of their estate to charity. 

Even if the testator does not leave a charitable gift in his will (or one that does not meet the minimum 10% benchmark), it is possible that his beneficiaries might choose to enter into a deed of variation to secure the reduced rate of IHT.

Charities should be aware that buried within the draft legislation bringing in the new relief is a requirement that all variations which pass assets to charity and are intended to qualify for IHT exemption will only be accepted by HMRC if it receives confirmation that the charity concerned has been told of the variation.

This is a significant change to the existing legislation and represents a major change of policy.  It appears to be targeted at the perceived risk that beneficiaries might enter into a variation passing assets to charity to secure the IHT charity exemption (and also to the new reduced IHT rate on the rest of the estate) but then not in fact pass those assets to the intended charity beneficiary at all.  Of course that would amount to fraud. 

There is no legal requirement for a charity to be made a party to a deed of variation where it is a beneficiary.  This must be correct, as other than in cases of small family-run charities, obtaining the signatures of charity trustees to a variation would present real logistical difficulties and result in a significant increase in costs for the estate.

How then is the estate to provide HMRC with the required confirmation that the charity has been made aware that it has been made a beneficiary of an estate under a deed of variation?

One way would be to recite in the deed of variation itself that the charity has been made aware, but that is likely to be insufficient as an unsubstantiated statement.  It is more likely that there will need to be an exchange of correspondence with the charity advising that there has been a variation which benefits it and asking that the charity acknowledges receipt of this notice. This exchange of correspondence can then be produced to HMRC to satisfy the new requirements.

Most importantly this change of policy does not just cover variations made to secure the new lower rate of IHT.  It applies to all variations made post-6 April 2012 under which charities benefit, whatever the amount involved.

Your in-tray may be about to get a little fuller as a result.

For more information please contact Sarah Albury