Update: charity

Gift aid

The judgment in Harris v HMRC [2010] UKFTT 385 (TC) concerned the application of the gift aid rules where a charity receives a gift as a result of a beneficiary varying his entitlement from an estate using a deed of variation. This is commonly done to save inheritance tax (IHT). The question was whether the donor and the recipient charity can also claim gift aid relief.

The two residuary beneficiaries in this case varied their late mother's will to gift part of their entitlement to a charity. They and the charity claimed gift aid on the funds in question. HMRC launched an enquiry and issued assessments to recover the gift aid from the beneficiaries and the charity.

There are strict rules on what benefits a donor can receive for gift aid relief to apply. All parties accepted that, if the donors in this case had received a benefit, this would exceed those limits. The tribunal considered whether there was a 'benefit', whether the beneficiaries 'received' that benefit and whether the benefit was 'in consequence of' the gift.

It held that the reduction of IHT was a benefit. The beneficiaries argued that it was not a benefit as the IHT rules deem the gift to have taken effect on the deceased's death and therefore no IHT liability ever accrues. The tribunal held that this was a statutory fiction created for IHT purposes and did not apply for income tax purposes. For income tax purposes, there had been an IHT liability which had been reduced by the deed of variation, and that was a benefit.

The tribunal also considered that the donors received that benefit. It was irrelevant that this benefit was not given to the donors by the charity or another third party; the meaning of 'receives' included a reduction in their tax liability. The tribunal also held that the situation was not analogous with a lifetime gift to charity which is exempt from IHT and CGT. In the latter case, no charge to tax ever arises.

The final question was whether the benefit was 'in consequence of' the gift. The tribunal held that this meant that the making of the gift had to be the reason why the benefit was received. It held that, on this basis, it was easy to conclude that the benefit (i.e. the IHT reduction) was received by the beneficiaries because of the gift. It rejected an argument that the benefit was not in consequence of the gift because the actual cash payment to the charity was made a time after the deed of variation.

Gift aid may be available on variations where there is no IHT benefit to the donor as a result of the variation; for example, if the estate is not taxable.

Failure of a charitable gift

In Kings v Bultitude [2010] EWHC 1795 (Ch) (see 'Update: wills and probate', 154/30, 3 August 2010) the testatrix left her residuary estate to the trustee of the Ancient Catholic Church known as the Church of the Good Shepherd. The gift was worth around £449,000. A problem arose as there was no such trustee in existence at Mrs Shepherd's death.

The church was formed in 1947. At one point it had several thousand members but it had declined by the time of the testatrix's death to four members. From 1995 to her death, the testatrix had conducted all of the services. After her death, meetings ceased and the remaining worshippers joined other churches. The court considered the following questions:

1. Was the gift to the church a valid charitable gift to an identifiable institution (i.e. the church itself or a successor body)?

The court held that the gift was capable of being a valid charitable gift. The church was formed for the advancement of religion and met the public benefit test. The problem was that the church had ceased to exist and there was no successor body. The church was doctrinally different from other Catholic churches and no steps were taken to find a successor body during the testatrix's lifetime. There was therefore no identifiable institution in existence at the testatrix's death so the gift would fail unless it could be saved cy pres.

2. Was the gift a valid charitable gift which failed subsequent to it having taken effect?

The Attorney General, on behalf of charity in general, argued that the church only ceased to exist sometime after the testatrix's death and therefore was subject to subsequent failure. This would have meant that it could be saved cy pres. The court disagreed. It held that although the church had continued after its last primate (the testatrix's husband) died, even though it became constitutionally defunct, it ceased to exist on her death. She was central to the existence of the church and, although survived by a small congregation, without her there were no services and the congregation went their separate ways.

3. Could the gift be saved cy pres because the testatrix had a paramount charitable intention?

The court held that the gift to the church was dependent on the continued existence of the church itself. Although the church's original purposes were for the advancement of religion, the testatrix had changed the activities of the church to fit her own beliefs. Some of the activities she carried out, such as the clairvoyant and medium sessions, were in direct contravention to the church's original purposes. The court held that the testatrix effectively embodied the church. Her gift was to the church as it was when she was alive and not for a more general religious purpose. In addition, there were no other charitable gifts in the will which the court could use to find a paramount charitable intention.

4. Did the gift fail and pass on intestacy?

As the answers to the above questions were no, the gift failed and passed on intestacy.

5. Who owned the church's remaining assets?

The church's assets totalled around £20,000. The intestacy beneficiary argued that these should form part of the testatrix's estate. The court disagreed. There was some evidence that the assets consisted of church collections. The testatrix kept them separate from her own assets. The court held that they were charitable funds and should be applied cy pres, which will now be the responsibility of the Charity Commission.

Catholic Care

The recent case of Catholic Care (Leeds) v The Charity Commission [2010] EWHC 520 Ch (see 'Update: ecclesiastical law',154/16, 27 April 2010) and the Charity Commission's subsequent decision hit the headlines in August.

The Equality Act (Sexual Orientation) Regulations 2007 prevents organisations and individuals from refusing to supply services on the grounds of sexual orientation. There is an exemption for charities if their objects limit them to assisting only those of a certain sexual orientation. The charity, a Catholic adoption agency, applied to amend its objects to limit its adoption services to heterosexuals. It said that if it could not discriminate, it would have to close. The Charity Commission refused to authorise the change on the grounds that the charity could not fall within the exemption. The commission's decision, although not its reasoning, was upheld by the Charity Tribunal.

Catholic Care appealed the tribunal's decision. The High Court quashed the decision and referred it back to the Charity Commission for further consideration in accordance with the principles set out in the High Court's judgment. The High Court found that the commission's reasoning for the decision was flawed and that it may be possible for the charity to come within the exemption.

The Charity Commission published its revised decision on 19 August 2010. It again decided that Catholic Care could not change its objects to limit its activities to heterosexual adopters but revised its reasons. It considered that the charity could only fall within the exemption if this was a proportionate means of achieving a legitimate aim. The charity would have to show 'weighty' reasons to persuade the commission to authorise the discrimination.

The charity had argued that if it closed fewer children would be adopted, as it tended to place hard-to-place children, and the harm those children suffered would be greater than the harm suffered by same-sex couples who could not adopt through Catholic Care. They also contended that there was no evidence that same-sex couples adopted hard-to-place children so they would not suffer any practical discrimination. Finally, the charity produced evidence that it would lose funding from the Catholic Church if it did not discriminate against same-sex couples.

The commission concluded that the charity's arguments did not justify discriminating against same-sex couples. Evidence from local authorities with which the charity worked suggested it would make little difference to the number of children placed if the charity shut its adoption service. The local authorities also confirmed that hard-to-place children had been adopted by same-sex couples. Finally, the commission noted the High Court's view that discrimination based on religious beliefs alone was unlikely to be sufficient to justify discrimination against same-sex couples, as the adoption service was a public activity.

The Equality Act 2010, which is due to come into force on 1 October 2010, will limit discrimination by charities even further. To impose any restrictions on the class of beneficiaries by reason of age, disability, gender reassignment, marriage and civil partnership, race (including nationality or ethnic origin), religion or belief, sex and sexual orientation (the 'protected characteristics'), a charity will need to show that it is acting in pursuance of its governing instrument and either that the restriction is a proportionate means of achieving a legitimate aim or that it is for the purpose of preventing or compensating for a disadvantage linked to a protected characteristic.

Unfortunately, the Charity Commission is yet to publish guidance on how the Act will be interpreted for charities. In addition, the Equality and Human Rights Commission is not expected to finalise its code of practice, which will explain when charities can restrict their services, until next year. It remains to be seen what practical difference the Act will make.

Land disposal

Charities and their solicitors will be aware of the provisions of section 36 of the Charities Act 1993 and the burden it places on charities. Although there are some exceptions, the general rule is that if a charity wishes to dispose of land it must first obtain a report on the disposal from a 'qualified surveyor'. Having to use a qualified surveyor can cost hundreds of pounds which could be completely disproportionate to the value of the transaction.

The government recently consulted on whether a charity should be able to approach another property professional for a report. It is likely that an estate agent, for example, would charge less for a report than a qualified surveyor. The response to the consultation was overwhelmingly in favour of allowing other property professionals, such as members of the National Association of Estate Agents (who do not have to be qualified surveyors), to provide reports. In addition, a number of replies raised concerns about the current procedure for disposals by charities and suggested that the government should conduct a broad review of section 36.

The Cabinet Office announced (in its response to the consultation which is available on its website) that it will extend the definition of a qualified surveyor in the Charities Act 1993 to cover other property professionals (although it has not specified which professionals). It is also going to consult on the provisions of section 36 more generally as part of the review of the Charities Act 2006 next year.