Tax & Estate Planning

Giving: The Fourth Step to Mental Wellbeing and The Win Win of In Lifetime Gifts to Charity

By May 14, 2021 No Comments

 By Helen Allen, Technical Director and Anna Kavanagh, Operations Director

This year, more than ever we should stop and take a pause during Mental Health week – to recognise and engage with some if not all of the informative content being published through varied channels about Mental Health.  As is constantly reiterated the global experience of this 21st Century pandemic has impacted us all.  And many of us, will have to some degree have experienced a detrimental impact on our mental well-being.

There is multifarious research evidencing the benefits of giving to others – and its place in the recognised five steps to mental wellbeing.  The NHS recognise that acts of giving and kindness can help with the varied impacts of stress, anxiety or depression improving your mental well-being by:

  • creating positive feelings and a sense of reward
  • giving you a feeling of purpose and self-worth
  • helping you connect with other people

Giving can take many varied forms.  Whether it be your time – through volunteering, your expertise – in fundraising, your concern – through caring for and helping others – be they family, friends, colleagues, community or strangers; or through charitable donation.

One common unsurprising theme we are seeing as we meet with you, our clients for often second, “in pandemic” review meetings is that you are certainly not spending at your planned rate, resulting in increasing accumulation of financial resource as your usual spending patterns on holidays, meals out with friend and family, or big family celebrations has been disrupted.

One option for this excess financial resource is to make a gift of some of this excess to a charity.

The government continues to encourage charitable giving by making a variety of tax reliefs available.

Income tax relief allows individuals and companies to make regular, or one-off payments to a charity. The charity can claim back basic rate tax from HMRC; the charity can claim £25 for every £100 donated, higher and additional rate tax payers can claim the difference between the basic rate and higher/additional rate (£25/£31.25).

Companies can set up payroll giving to make gifts to charity by deducting from employees pay; the deductions are made after National Insurance has been calculated, but before income tax is calculated meaning the employee gets the income tax relief straight away, without having to report the gifts to HMRC.

Whilst there is no statutory limit on the amount of the gift which can be made, in practice there will, be as a tax efficient gift can only be made within the taxable income of the person making the gift. Those paying tax below basic rate may make gifts qualifying for Gift Aid, but if they have not paid enough tax to cover the tax deducted from their contribution, HMRC may ask for them to pay the difference!

Where an individual has paid enough tax, Gift Aid donations can be carried back to the previous tax year.

Non-cash gifts can also be made of a qualifying investment which includes shares listed on a recognised stock exchange or the Alternative Investment Market, Unit Trusts or OEICs or a qualifying interest in land. The market value of the investment at the time of the gift is deductible in computing income in the year of the gift. Charities will guide the individual through the procedure.

Non-cash gifts to charities qualify for CGT relief; no capital gains tax arises on the disposal of the investment to a charity. However, unless the acquisition cost of the investment is very low compared to the value when gifted, as Gift Aid relief (income tax) only applies to cash gifts, it is likely to be more beneficial to the donor to sell the investment and then make a cash gift to the charity.

Gifts to charities during your lifetime, or via your Will are also Inheritance Tax efficient; no limits on the amounts that can be given during your lifetime without reducing your Nil Rate Band for IHT purposes, and the value of any charitable gifts via your Will are not included in your taxable estate for IHT purposes, not only that but a charitable gift of 10% of your net estate value reduces the rate of IHT paid by your executors to 36%.

Whilst there are IHT benefits of leaving money to charity through your Will, these gifts do not fall under the Gift Aid provisions, so the charity will not be able to claim the additional £25 for every £100 received, and neither can your executors claim higher or additional rate Gift Aid relief on your passing. However, a planning opportunity may be to leave a legacy to an individual rather than a charity, and for that beneficiary to make a legacy to a charity, then claiming Gift Aid relief.

If there is no charitable legacy in the Will, it is also possible for beneficiaries to exercise a Deed of Variation so that the legacy is treated (subject to the Deed being executed within two years of death) as being made by the deceased for Inheritance Tax purposes, but for income tax purposes the original Will beneficiary will be able to obtain tax relief under Gift Aid rules.

This really is a win win win.  Not only will you benefit from the evidenced positive mental wellbeing effects of these gifts, but your chosen charity and its benefactors will benefit immeasurably, more so by this gift being made in lifetime.  Be it a large national organisation like the National Trust, or a small local community charity perhaps supporting those so detrimentally affected by the effects of this Coronavirus COVID-19 Pandemic.