From the First Tier Tribunal

IHT charitable exemption and gift aid

It is well known that there is an IHT exemption for gifts to charity. For IHT to be an issue, the gift would need to have been made within the seven years before the death of the donor, or of course by his will. There is, however, another possibility. The original, non-charitable, beneficiaries of a will (or an intestacy) may enter into an agreed Variation under s142 IHT Act 1984, under which all or part of their entitlement may be redirected to a charity. For IHT purposes, the deceased will be regarded as having made that gift directly to the charity, and the benefit of the IHT exemption will be obtained. However, s142 IHT Act 1984 is a deeming provision that applies only for IHT purposes. There is no equivalent to s142 IHT Act 1984 for income tax. This may work to the disadvantage of the taxpayer, where the agreed variation imposes trusts. For IHT purposes, as a result of s142 IHT Act 1984, the deceased will be deemed to be the settlor, but for income tax purposes the ‘settlement rules’ will apply on the basis that the beneficiary entering into the Deed of Variation provided the funds for the settlement and will be treated as the settlor. Can this principle be applied to benefit the taxpayer? Where the s142 Variation benefits a charity, can the beneficiary claim ‘Gift Aid’ relief for income tax purposes on the value of the redirected legacy? The taxpayer attempted to have his fiscal cake and eat it in Harris v HMRC [2010] UKFTT 385.