Charitable giving is responsible for the billions of pounds raised each year which supports good causes in the UK and worldwide. At this time of year many of us make donations of cash or recycle unwanted Christmas presents to charity shops.
Governments of all persuasions have encouraged the voluntary sector to grow and have encouraged charitable giving with the incentive of tax breaks. Here are a few ways in which the value of gifts to good causes might be increased and also save some tax into the bargain.
A donation of money or goods to a charity from a UK resident taxpayer qualifies for gift aid on the value of the gift. This enables the charity to claim the equivalent of basic rate tax from HMRC which boosts the value of your gift by 25%. Many charities routinely ask the donor to sign a form to confirm that they are a taxpayer on cash gifts and an increasing number of charity shops also use this to increase the value of donations. If you are a taxpayer and are not asked about this, it may be worth prompting the charity to claim the gift aid, as some charities do not like to ask what may be perceived as an intrusive question.
Higher rate taxpayers, with taxable income in excess of £45,000 (£43,000 in Scotland), may also claim gift aid relief which gives an additional tax saving to the donor. Notifying HMRC of the gifts made will result in an alteration of your tax code, reducing the overall amount of tax payable.
For example a 40% taxpayer donates £100. HMRC adds £25 to this. The basic rate band is increased by £125 which means that the taxpayer saves 20% tax or £25 on the gift so the charity gets £125 at a net cost of £75 for the taxpayer.
Gift aid donations also have the effect of reducing taxable income for the purposes of the £100,000 taxable income threshold, when the taxpayer starts to lose the personal tax allowance and the threshold for child benefit clawback of £50,999. So charitable giving can offer additional benefits to those just over these thresholds.
If gifts have been made in earlier years without claiming gift aid, claims for relief can be backdated for up to 4 years using form P810 from HMRC. Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).
Whereas, self assessment usually deals with taxes due in the previous tax year to 5 April, gift aid can also be claimed on gifts made in the current year. This can mean that if a taxpayer was a higher rate taxpayer, but is now a basic rate payer, relief can still be claimed at the higher rate for one year.
If you cease to be a taxpayer and continue to make charitable donations you must inform the charity that your gifts no longer qualify for gift aid.
Some employers and pension schemes operate payroll giving schemes, these allow regular donations to be deducted from pay before tax is calculated. Such donations give tax relief automatically at the appropriate rate and so no additional claim for this is necessary.
Gifts of Land, Shares or Property
Gifts of assets, or sales at less than market value, also qualify for gift aid relief and can be offset against income tax or capital gains tax due on any appreciation in the asset.
All gifts to registered charities are exempt from inheritance tax (IHT) and do not use up any of the other IHT allowances, such as the £3,000 annual allowance throughout life or the nil rate band on the estate.
If 10% or more of a taxable estate is left to charity, the rate of inheritance tax applying to the rest of the taxable estate may be reduced by 10% so that currently a rate of 36% rather than 40% is applied.
If gifting land property or shares to a charity, it would be wise to check that these assets are not IHT exempt for other reasons, for example; agricultural land, forestry and certain shares may be exempt from IHT. Where an estate compromises both exempt and taxable assets, gifting the taxable assets to the charity is more effective.
If intending to leave a large portion of an estate to a charity it may be advisable to make relatives aware of this and to ensure that they are in accord with the decision. While English law does not impose a right of inheritance, there have been some high profile cases where family members have disputed the validity of wills which left charitable legacies. Taking legal advice, when writing a will, is advisable.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.Back to News & Views