ACCA Advanced Taxation (ATX) Practice Exam

Are charitable legacies subject to inheritance tax (IHT)?

1. Yes, always

2. No, they are exempt

3. Only if they exceed a certain limit

4. Only if the charity is foreign

The correct answer is: No, they are exempt

Charitable legacies are indeed exempt from inheritance tax (IHT) in the UK. This means that when an individual leaves money or assets to a registered charity in their will, that portion of their estate is not subject to IHT, thus promoting philanthropic giving. The rationale behind this exemption is to encourage individuals to support charitable organizations, which provide social benefits. Additionally, it is essential to note that in the UK, any charitable legacy will not reduce the nil-rate band when calculating the inheritance tax payable on the rest of the estate. When considering other options, the notion that charitable legacies are always subject to IHT does not align with the tax relief provided for such donations. Similarly, the idea that they are subject to IHT only if they exceed a certain limit overlooks the fact that any amount left to a qualifying charity is free from IHT regardless of its size. Furthermore, the assertion that foreign charities might affect the tax implications does not hold, as the exemption applies broadly to registered charities within the UK, irrespective of their global status. Thus, the understanding that charitable legacies are exempt from inheritance tax encompasses the core principles of IHT legislation in relation to charitable giving.