Tax Planning with Charitable Giving

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 £2 for every £10 (gross) donated, higher and additional rate tax payers can claim the difference between the basic rate and higher/additional rate (£2 or £2.50 for every £10).

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 £2 for every £10 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.

Going back to the sport-related introduction to the article, tax efficient gifts can also be made to Community Amateur Sports Clubs (CASCs); to qualify as a CASC a sports club must provide facilities for, and promote participation in, one or more eligible sports, be open to the whole community, with at least 50% of the members participating in the sport at least 12 times per year and be organised on an amateur basis.

These are strange and difficult times for all of us, and particularly for the many vulnerable people in our society and the wider world, let’s not forget the vital support charities provide and continue to support them financially, even if many large fundraising events are not able to be held at this time, the tax savings are still available.

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