Seasonal ill-will: IHT on donations

/ 2 January 2018

David Whiscombe

The press has become exercised over Christmas about HMRC’s alleged pursuit of donors to the “Leave” campaign for Inheritance Tax (“IHT”) on their donations.

So now might be a good time to remind ourselves how these things work.  What we say below applies to people of UK domicile.  If you are not (and not deemed to be) of UK domicile the rules are different.

IHT is a tax on estates and, in some circumstances, a tax on gifts.  And it’s primarily as a gifts tax that we are interested in it here.

The basic rule is that if your estate is diminished by anything you do (or fail to do), you are likely to have made a “transfer of value”.  If you have, the next thing is to consider whether it’s a “chargeable transfer”.  And if it’s a chargeable transfer, the final step is to worry about whether any tax is payable.

Things that you do without intending to confer any gratuitous benefit on anyone (like buying goods or services that you consume yourself) are not usually transfers of value, so fall at the first hurdle. And gifts that you make to other people aren’t usually chargeable transfers (at least if you survive seven years from making the gift).

It’s mainly gifts to “non-humans” (such as trusts, companies, organisations and so on) that can cause IHT trouble.  If in any seven-year period such gifts exceed £325,000, IHT can be payable at 20% on the excess.  Or more – we’ll come back to that.  And any such gifts (whether or not the £325,000 limit has been reached) that are made within seven years before death are “written back” to the estate on death and will, in most cases, increase the IHT payable on death.

Some categories of gift to non-humans are exempt.  These include, among other things, gifts to charities and to political parties (provided they managed to get at least two MPs elected at the latest General Election, or one MP and 150,000 votes – so Sinn Fein qualify but UKIP don’t).  They don’t, however, include gifts to campaigning organisations and pressure groups that are neither qualifying political parties nor charities, such as the “Vote Leave” (or, come to that, the “Vote Remain”) campaign: and that’s where the problem has arisen.

None of this matters if the chargeable transfers over seven years don’t exceed £325,000 and you survive seven years from making them.  But it seems that a number of donors who made substantial donations to one side or the other in the EU referendum campaign have overlooked the need to make the appropriate returns and have found HMRC coming after them.  And although the “headline” rate of tax is 20%, the tax, where paid by the donor, is charged on a grossed-up basis so is effectively 25% of the amount donated.

It seems some donors may have cried foul, contrasting HMRC’s assiduousness in collecting IHT in respect of Vote Leave donations with their failure to raise the point in respect of sizeable donations they have made in the past to other campaigns, and implying some political agenda or interference.  That may, for all we know, be so. It nonetheless seems curious and somewhat self-defeating, when HMRC nobble you for failure to declare a tax liability, to offer the defence that you got away with it last time…

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David Whiscombe


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