A recent article in Tax Journal, a publication for tax professionals, brought to the professions’ attention a little known change to the tax status in the United States of many well-known UK charities which could have a significant impact on any UK charities that receive donations and income from US donors and investments.
The charitable status of UK based charities was revoked automatically between 2010 and 2016 by the Internal Revenue Service (“IRS”), the US equivalent of HM Revenue & Customs. The impact on the UK charities is that US citizens (including US citizens living in the UK) will find it much harder to claim the US equivalent of Gift Aid on their donations made via US charities because the US charities must verify that the donations are used for charitable purposes. This usually requires the ring fencing and tracing of US sourced donations. US citizens will also be unable to claim relief from US estate and gift taxes on any gifts made via Wills or in their lifetime in relation to donations made to the charities.
In addition, UK charities with investments based in the US, perhaps shareholdings in US companies, will be unable to claim a reduced rate of withholding tax on dividends paid by US companies.
The list of affected UK charities can be found on the IRS website. Click on “Exempt organisations select check tool”, then “Were automatically revoked”, then select UK on the “Country” drop down menu.
If charities appear on the list, they may wish to apply for reinstatement on to the list of approved charities. Charities will be required to file detailed annual returns with the IRS which requires the payment of fees and potentially the need for professional support in the US. The decision will depend on the size of existing and potential donations from US citizens and the value of investment income received from the US.
Further Information & Legal Advice
If you would like more information or legal advice, please do not hesitate to contact a member of the Tax or Charity Team.
TAXCHARITY & NOT FOR PROFIT