Beneficiaries of a will who used a deed of variation to donate part of their inheritance to charity cannot rely on Income Tax (IT) relief on the donation, following a recent Tribunal decision.
Mr Ronald Harris and his sister, Mrs Irene Fine, inherited over £4 million in 2004, following the death of their mother in January of that year. Mr Harris and Mrs Fine sought to gain tax relief as a consequence of donations made to a charitable trust of which Mr Harris was a trustee, under a deed of variation of their mother’s will. A deed of variation enables beneficiaries to alter the distribution of an estate.
It was agreed that £500,000 would be left to the charity out of Mr Harris’s share and £50,000 out of Mrs Fine’s share. These amounts were subsequently paid to the charity between December 2004 and January 2006 and were treated for tax purposes as qualifying for ‘gift aid’. Subsequent claims by the charity produced refunds in respect of these donations amounting to over £155,000. Mr Harris also received higher rate tax relief of some £115,000 and Mrs Fine £11,500.
A later enquiry by HM Revenue and Customs (HMRC) into the 2004/05 and 2005/06 tax assessments led to HMRC writing to the charitable trust to recover the repayments of basic rate IT previously made to it. An appeal was lodged by the charitable trust with the Tribunal in May 2009. It was accepted that if it were ruled that the charity’s claim was dismissed, Mr Harris’s and Mrs Fine’s claims for higher rate tax relief would also fail.
The main area of dispute between the Harris family and the tax commissioners was whether Mr Harris and Mrs Fine, as the donors of the charitable gifts, received a benefit in consequence of making the gifts, the benefit being Inheritance Tax (IHT) relief. The case was complicated by the fact that Mr Harris was an executor of the will, a beneficiary and also a trustee of the family charity. Furthermore, the Tribunal discussed in some detail the various relationships between the provisions for exemption from IHT and those of relief from IT under the ‘gift aid’ provisions stemming from the Finance Act 1990.
The Tribunal dismissed the appeal. Mr Harris and Mrs Fine had each received the benefit of the IHT exemption in their capacity as beneficiaries of the will and were consequently not entitled to IT relief under the ‘gift aid’ provisions.
“This case clearly illustrates the complexity of tax law when it comes to inheritance and charitable legacies and donations. Such matters require careful planning and expert guidance,” says <<CONTACT DETAILS>>.
Ronald Michael Harris v Commissioners for HMRC  UKFTT 385 (TC). See