Leaving money to an EU-based charity will soon lose its tax-free status thanks to changes made to inheritance tax rules in March.

It is not uncommon for people to bequeath part of their wealth to charitable causes after they die. Up until this year such gifts have incurred no inheritance tax liabilities and are often seen as a positive way to give out wealth to those who might most need it.

Nevertheless, in the Government’s Budget in March, part of the fresh rules included a tweak to the relief on charitable gifts, which means that the tax relief would only be available to UK-based charities.

The change to the rules immediately impacted foreign charities. However, there is a transition period in place for EU-based charities until April 2024.

After that point any charity that is not based in the UK, including EU charities, will no longer be able to claim charitable tax relief on donations. Any estate bequeathing to a non-UK charity will lose the inheritance tax relief previously available.

How does charitable tax relief work?

Currently you can bequeath an unlimited amount of money to charity in your will and incur no inheritance tax (IHT) liabilities.

If you gift 10% or more of your estate to charity it reduces your IHT rate from a 40% charge on wealth over the nil rate band to 36%. It is one of many measures that are effective in reducing the overall potential IHT bill when you die.

With more estates moving into IHT liability, particularly with the bands frozen for more than a decade, this is no inconsiderable way to mitigate some of the potential liability.

What does the tax relief change mean?

Mitigating IHT through charitable donations is still a viable way of reducing your eventual IHT liability. However, the caveat is now that this will only apply to UK-based charitable donations from April 2024.

It is an incredibly tough decision to make, but if a non-UK charity is currently named as a beneficiary of your estate in your will, then this could have significant implications for the eventual tax bill to be paid by your estate.

If the charity you have in mind has UK-based entities, then ensuring you specify it will go to that branch will still be an effective strategy. However, outside of the UK, the same no longer applies.

This could also have an effect on British expats based in the EU with charitable giving in mind, as they could be caught out gifting to charities where they live abroad too.

If you have a nominated charity in your will that isn’t UK-based and would like to discuss your options, or for any other questions around inheritance tax planning and how charitable giving relief works, don’t hesitate to get in touch.