HM REVENUE & CUSTOMS Consultation Document: A new incentive for charitable legacies Publication date: 10 June 2011 1 STEP 1.1 The Society of Trust and Estate Practitioners (STEP) is the worldwide professional body for practitioners in the fields of trusts and estates, executorship, administration and related issues. STEP aims to promote the highest professional standards through education and training leading to widely recognised and respected professional qualifications. STEP also works to demonstrate the value of good stewardship and planning across future generations to governments, professionals, financial institutions and the public. STEP internationally has over 16,500 members with over 6,000 members in the UK. Over 4,000 students worldwide are currently studying for STEP qualifications and in the UK STEP supports an extensive regional network providing training and professional development. 1.2 STEP is grateful for the opportunity to comment on the proposals set out and to respond to the questions raised in this Consultation Document. 2 General We wish to make a few general comments before turning to the specific questions raised. 2.1 While we note the proposals in the Consultation Document are designed to encourage and facilitate charitable giving we are aware of a number of concerns that have been raised in relation to the approach adopted. These include the concern that to introduce a new, and possibly complex relief runs counter to the policy being taken forward by the Office of Tax Simplification in rationalising and abolishing reliefs. It has also been suggested that a more effective and indeed simpler way of assisting charities would be to provide for some form of relief such as transitional relief compensating charities for the reduced ability to reclaim tax following the reduction of the basic rate of income tax. There is some force in these comments for which we have sympathy. 2.2 Nonetheless we support increasing charitable giving and we therefore respond to the questions in the Consultation Document as set out below. 3 Question 1 We consider that in principle the reduced IHT rate should not be restricted only to assets within the free estate. Any extension of the relief to assets outside of the free estate would need to be done by way of election involving the personal representatives of the deceased. We discuss this in more detail in relation to Question 2 below. 4 Question 2 We comment on the separate paragraphs within Question 2 following the lettering set out in the Consultation Document. (a) In our view the relief should be extended to jointly held property whether or not it extends to other property. We also consider that the relief should extend to property in which there is a qualifying interest in possession and to property which is subject to the gift with reservation rules on the death of the deceased. (b) Any extension of the relief to property outside the free estate should only in our view be done by a joint claim made by the personal representatives of the deceased and (1) in the case of jointly owned assets with the owner of the jointly owned asset or (2) in the case of settled property with
the trustees of the settlement concerned and (3) in the case of property subject to the gift with reservation rules with the beneficial owners of the property concerned. (c) Where assets outside of the free estate are included the baseline for the relief would clearly have to be calculated by reference to all the assets included, and by reference to all the assets passing to charity on the death of the deceased. This would include assets passing to charity from settled property where there is a qualifying interest in possession on death. Consideration might be given here to extending the rules on Instruments of Variation to settled property for the purposes of this relief. This would facilitate charitable giving from settled property. Property subject to the gift with reservation rules would normally only increase the baseline but not add to the total of charity legacies because property subject to the gift with reservation rules on death would not pass to charity nor be property which could be the subject of an IoV. It would be important that a joint claim should be required for assets other than assets in the free estate to be included: the inclusion of other assets might result in the 10% test being failed in relation to assets in the free estate due to the increased figure of the baseline. And further the personal representatives, the trustees of the settled property or the donee of the property subject to the gift with reservation rules might not consider the increased administrative burden justified by the relief being extended to assets outside the free estate. 5 Question 3 5.1 We do not favour limiting the relief to legacies of more easily realisable assets such as cash, quoted shares or real property. Excluding not easily realisable assets from inclusion in a legacy in favour of charity would not necessarily reduce the valuations that would need to be agreed between the personal representatives and HMRC. The value of assets which are not easily realisable will still be relevant to the calculation of the baseline for the 10% threshold unless possibly the value of such assets in the context of the estate as a whole is clearly very low and unlikely to be material in calculating the baseline and the satisfaction of the 10% threshold. 5.2 Further we consider there are a number of reasons why it is particularly important that the relief should be available in relation to all categories of assets. 5.2.1 Firstly, estates may not include significant assets that are easily realisable and restricting the relief to legacies of easily realised assets may preclude some estates from qualifying at all. 5.2.2 Secondly, to restrict the relief to legacies of the easily realised assets would in many cases preclude a gift of residue or of a share of residue from qualifying for the relief because the residue of many estates will include assets which are not easily realised. 5.2.3 Thirdly, we set out in the appendix to this response a possible model clause which could be adopted for inclusion in wills designed to qualify for the new relief. This clause would be difficult to apply and would not be effective if the relief only applied to legacies of easily realised assets. 6 Question 4 There will, as the Consultation Document points out, be administrative burdens on personal representatives and HMRC in relation to assets not easily realisable. But, as mentioned in paragraph 5.1 above, such assets in most cases will need to be valued in any event in order to calculate the baseline. 7 Question 5 The reduced rate of IHT where there is a charitable legacy of 10% should not be automatic but should then require a claim by the personal representatives and, if assets other than the free estate are included, the joining in of the trustee or owner. We agree that in some cases the
administrative burdens particularly in relation to valuations involved in claiming the relief might exceed the benefit of the relief and that for this reason the relief should not be automatic. 8 Question 6 8.1 We wonder whether there is any great scope for avoidance by the manipulation of the value of assets comprised in charitable legacies. The value placed on an asset not easily realisable or not having an independently ascertainable open market value will require negotiation with HMRC. The possibility of the manipulation of the value of the asset would normally be a factor in the valuation process. If the asset included in or appropriated to a charitable legacy were later, following the valuation, subject to an avoidance scheme for example if value was stripped out of the asset for the benefit of non-charitable beneficiaries the charity would no doubt complain. And as mentioned above the possibility for the manipulation of the value would be an attribute of the asset concerned and it would therefore have been a factor that would have been taken into account in the valuation discussions. 8.2 For the reasons given above we do not consider that there is any need for specific anti-avoidance measures in relation to the new relief. Further the inclusion of anti-avoidance provisions would complicate the relief. In our view it will be important in encouraging the wide use of the relief to keep it as simple and straightforward as possible. If it appears subsequently that avoidance schemes are being implemented using the new relief anti-avoidance measures could then be considered. 9 Question 7 Please see our comments in relation to Question 6. 10 Question 8 We do not think that any further formality involving the charity legatee is needed in relation to an Instrument of Variation (IoV). As with any IoV, whether or not a reduction in IHT is involved, it is necessary for the parties to implement the terms of the IoV. Where an IoV is executed there will usually be professional advisers involved and the likelihood of the parties deliberately not implementing the terms of the IoV must be extremely remote. We do not see why there is any greater risk here than in other contexts. If some further comfort is needed it could be made a condition that the relief should only be given on HMRC being given such information as it may reasonably require to satisfy itself that the charity concerned has been informed. But as mentioned we are not convinced this is necessary. Similar provision could be made in relation to appointments under wills in favour of charity under s.144 IHTA 1984. 11 Question 9 11.1 It will, in our view, be important to keep will drafting as simple as possible in complying with the requirements of the new relief. 11.2 It will be difficult for testators, possibly years in advance of their death, to know how much they would need to leave to charity in order to qualify for the relief. For example, they will not know the value of their estate on their death, nor the make up of the assets, nor the reliefs such as agricultural property relief and business property relief that may be available. There may also be new exemptions or reliefs introduced after the making of the will and before the testator s death. It is for this reason that it is essential, in our view, that a simple clause that will qualify under the new provisions should be widely available. 11.3 We have accordingly set out a proposed model clause in the appendix to this response. The clause is drafted as a pecuniary legacy that can be satisfied by the appropriation of assets. It is not drafted as a gift of a part of residue in order to simplify the IHT returns and avoid the process of a double grossing up that applies under sections 36 to 42 IHTA where residue is partly exempt. It would be very helpful to practitioners and to taxpayers if HMRC could confirm that such a clause
(with any appropriate amendments) would be accepted as complying with the requirements for the new relief. 12 Question 10 We consider that the 10% test and the application of the reduced rate of IHT should apply to the non-deferred part of the estate. The full rate of IHT would then be paid on property which ceased to qualify for the deferral of IHT. 13 Question 11 We do not consider that the existing processes to deal with amendments to the IHT liability in relation to the new relief would give rise to any particular issues. 14 Question 12 We do not consider that limiting the basis for the 10% test for non-uk domiciled persons to assets on which they are liable to IHT will present any difficulties. It should be noted here that assets of non-uk domiciled individuals which are outside the scope of IHT will not only be assets situated outside the UK but also certain assets exempted from UK IHT by double taxation treaties. For example, under the UK/US Double Taxation Treaty on estates and gifts, assets situated in the UK and beneficially owned by a person domiciled in the US and not a UK citizen are not liable to IHT unless the assets concerned are UK real estate or unincorporated business assets. Assets such as stocks and shares situated in the UK of such a person would be outside the scope of IHT. We assume that such treaty protected assets would also be left out of account. 15 Question 13 We agree that grossing upward should be made by reference to the reduced rate of IHT. We do not anticipate any problems with using this method. 16 Question 14 In the allocation of exemptions and reliefs we agree that basing the 10% test on the actual value of the legacy before the application of those reliefs would be preferable and should not, we think, present any difficulties. 17 Question 15 We have no particular comments to make in relation to this question. 18 Question 16 We anticipate that our members will promote the measure. It is difficult, in advance, to predict what the take up will be. We set out below some comments on how the relief might be made more attractive and easy to comply with. 19 Question 17 We make no comment on this question and we defer to charities in this respect. 20 Further Specific Comments We would like to make the following further comments on how the relief is to be applied. 20.1 Calculations have been produced which demonstrate that the benefit to the non-charity beneficiaries diminishes proportionately to the extent that the legacy to charity forms an increasing proportion of the estate. This mathematical consequence may deter the testators from leaving
legacies to charity significantly in excess of 10% of the net estate. Of more concern may be the possibility that it might encourage testators who have left significantly more than 10% of their net estate to charity to reduce the percentage to 10%. While it is hoped that these concerns may be overstated, the matter could be addressed by increasing the reduction in the IHT rate on the part of the estate not passing to charity proportionately more where the gift to charity is of a larger proportion of the net estate. The reduction in the rate of IHT could be increased proportionally up to a legacy of, say, 50% of the net estate to charity. While we acknowledge that there will be a cost in tax revenues and implications for the Treasury we would recommend that this is given serious consideration. 20.2 There will be a disadvantage to spouses or civil partners where the first to die leaves legacies to charity which do not meet the 10% threshold and where the legacies of the survivor also do not meet the 10% threshold but collectively the threshold is met in relation to the net estate of the survivor. We would recommend that consideration be given to allowing the value of legacies to charity under the estate of the first to die which do not qualify because they fail the 10% test to be carried forward to the death of the survivor and to be aggregated with the legacies left under the survivor s will. This would be similar, in principle, to the transferable nil rate band..
APPENDIX We set out below a possible model clause that might be adopted by persons wishing to leave a legacy qualifying for the new relief. The drafting will of course need to be finally prepared on the basis of the exact legislation as passed. Any clause of a general nature like this would need to be qualified to deal with possible concerns. The first such concern is that a legacy defined by reference to the relief will fail if the estate turns out to be below the threshold for a taxable estate. Another possible concern is that a legacy drafted so as to qualify for relief might leave to charity too much as a proportion of the estate passing on the death of the testator. This might arise, for example, if the estate on death was worth less than anticipated. In such a case there might be a risk that the dependants of the deceased would be prejudiced. The clause below is designed to provide for a legacy which would qualify for relief but which also contains optional provisos designed to address the concerns mentioned above. Proviso (ii) addresses the second concern referred to above that the legacy to charity might comprise too large a proportion of the estate on death. The consequence of including the proviso may be that the 10% threshold is not met and that relief would not be available. The proviso includes a number of options in this event. The testator or testatrix may wish to alter the amount of the legacy or indeed to omit it entirely. The appropriate option could be adopted. Draft clause I give [name of charity] such a sum as is equal to 10 (or insert larger figure) per cent (%) of my net estate as defined in section [ ] Inheritance Tax Act 1984 and my executors may appropriate assets not otherwise specifically bequeathed to satisfy (or partly satisfy) this legacy without the consent of any beneficiary under my will or any codicil to my will. [The legacy given by this clause shall in no event: (i) (ii) be less than [ ] whether or not relief under section [ ] Inheritance Tax Act 1984 shall be available; and exceed [ ] (the upper limit) even if in consequence of this restriction the value of the legacy relief shall not be available under section [ ] Inheritance Tax Act 1984. [If this proviso shall apply and in consequence relief shall not be available under s[ ] Inheritance Tax Act 1984 the amount of this legacy shall [be equal to the amount of the upper limit] [ be reduced to [ ] ] [shall lapse.]] Submitted by STEP UK Technical Committee 22 August 2011