Articles
Tax-Efficient Charitable Giving
Despite a general increase in tax rates over recent years, and a tightening of many rules, there remain several tax incentives to encourage charitable giving in the UK.
There are a number targeted at individual taxpayers, the most common of which can be summarised as follows:-
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Gift Aid
The Gift Aid scheme is for gifts of money to registered charities by individuals who pay UK tax. Donations are regarded as having been paid net of basic rate tax and the charities reclaim the basic rate tax from HM Revenue & Customs (HMRC) on its 'gross' equivalent. Basic rate tax is currently 20%, so this means that a donation of £100 is worth £125 to the charity.
Those liable to tax at higher rates are able to claim relief based on the ‘grossed-up’ amount of such gifts over and above the basic rate. For example, based on the example above a 40% taxpayer would receive tax relief of £25, i.e. £125 @ 20% (being 40%-20%). Similarly a 50% taxpayer would be entitled to higher rate relief of just over £37, i.e. £125 @ 30% (being 50%-30%) .
However, donors should take care to ensure that they have paid sufficient tax to cover the tax reclaimed by the charity, as any shortfall would need to be paid over to HMRC. To assist in maximising the level of relief, or minimising any claw-back of basic rate tax, it is possible to treat any donations made after the end of a tax year, but before submission of a Tax Return for the year concerned, to be treated as though paid in that earlier year.
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Gifts of Shares/Property
Individuals can also obtain relief at their top rate of tax for gifts of certain types of securities, as well as interest in land, to registered charities. Very broadly, these could include quoted shares, holdings in unit trusts and freehold/leasehold properties, and relief is based on the market value on the date of gift. For example, a 40% taxpayer would obtain relief of £400 on a gift of assets worth £1,000. Relief will similarly be available for sales to charities at undervalue, restricted to the difference between market value and proceeds received.
Furthermore, capital gains tax (CGT) on any increase in the value of the asset since original acquisition will not apply. However, conversely if the asset has gone down in value, it will not be possible to use this loss to offset any other CGT liability.
As a result of these regulations, in most circumstances it will be beneficial for donors to make outright gifts of relevant assets rather than sell personally and make a gift of the after-tax cash.
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Payroll Giving
Employed earners and those in receipt of occupational pensions may also be able to make charitable donations through a Payroll Giving Scheme. These work by deducting a chosen amount of donation directly from pay/pension before the deduction of tax under Pay As You Earn, giving an immediate saving of tax at the highest rate on the income concerned. For example, the net cost of a monthly £100 donation by an employee paying sufficient tax at 40% on their earnings would be £60.
In order for individuals to take advantage of this Scheme, it is necessary for the Employer or pension provider to register with an approved Payroll Giving Agency.
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Tax Refunds
Through the mechanism of the annual Self Assessment Tax Return it is possible to elect for any tax refunds due to be paid over to a nominated charity. In addition, any donation made in this way can be deemed to be a Gift aid donation, augmenting the amount received by the charity and with potential for higher rate tax relief as set out above.
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Gifts on Death
Finally, in all senses of the word, gifts to charities included in wills are excluded when valuing estates for Inheritance Tax purposes when someone dies.
In addition, it is possible for companies to obtain a corporation tax deduction for charitable donations, although there is no equivalent to the Gift Aid to provide a further tax credit for the charity. Relief is not, however, available if the donation is a distribution of profit, such as a dividend, or if benefits provided to the company, or those connected to it, exceed prescribed limits.
The above points are intended as a very brief guide to some extremely detailed rules. Whilst care has been taken in preparation of this note, professional advice should be sought before undertaking any major transactions.
Please feel free to contact us at info@saffrontax.com, or on our helpline number 020 7337 6022, if you would like to discuss these issues further.
October 2010