Tax Efficient Charitable Giving

Over the years, the tax reliefs for charitable giving have been progressively relaxed to the extent that the formalities are now easily satisfied in most cases. From April 2013, charities that receive small donations of £10 or less will be able to apply for tax repayments in respect of those gifts without any need to obtain a gift aid declaration at all.

Nevertheless, anyone considering making a significant donation to charity in the expectation of receiving tax relief for the gift needs to be aware that there are still conditions which have to be satisfied. In this memorandum, we set a summary of the tax reliefs for private gifts to charity together with an outline of the appropriate conditions. Please note however that this is purely a guide and not an exhaustive exposition of the subject.

What qualifies as a charity

Until early last year, HMRC maintained that all the various tax reliefs for gifts to charity were available only if the charity was based within the UK. This would mostly require the charity to be registered with the Charity Commission, although there are exceptions, for example local churches do not have to be registered in this way.

The Government recognised that this requirement infringed European law since it gave favourable treatment to domestic charities and put charities elsewhere within the EU at a disadvantage. An announcement was therefore made that the reliefs would be extended to all charities and community amateur sports clubs in the European Union and in Norway and Iceland. The widening of the relief was accompanied by conditions to be satisfied by the overseas charities relating to the management of them and also how they are registered. In principle, however,  charity reliefs are now available for gifts to all EU charities and not just those which are UK based.

The income tax reliefs

A long standing charitable relief is the gift aid scheme which works by treating a charitable gift as being made net of a deduction of basic rate income tax. Thus a gift aid donation of £80 in cash is treated as a gross donation of £100 less basic rate tax deducted. The gross amount of £100 is deductible from taxable income for that year in order to give tax relief to the donor. The donor is treated as already having received the 20 per cent basic rate tax relief so that what remains to be given in the personal tax calculation is any higher rate relief.

If the donor is only a basic rate taxpayer, then the gift aid scheme offers no monetary benefit to him or her, although the charity will still be able to recover the notional tax deducted from each gift.

A donor cannot make a gift aid donation to a charity with a view to its using the money in order to buy an asset from him or her. Also the donor must not receive any significant benefit from the charity as a consequence of making the gift; for this purpose there is a scale of percentages which applies, for example where the gift is greater than £100 but no more than £1,000 the limit on benefits is £25.

The limit on benefits is however relaxed in the case of admission rights to properties open to the public, which is the reason why such venues commonly seek gift aid declaration from all visitors.

Gifts of certain assets to charities

Income tax relief is also available to donors of certain assets to charities. The list of assets qualifying for this relief is as follows:

1. quoted shares
2. units in an authorised unit trust or shares in an open-ended investment company
3. units in an offshore fund
4. freehold land or a leasehold interest for a term of years.

The market value of gifts of the above type to charity counts as a deduction from taxable income in the year in which it is made. For this type of gift, there is no limit on benefits received back from the charity by the donor, but instead the amount of any benefits are deducted from the value of the gift in calculating the amount on which tax relief can be claimed.

Capital gains tax reliefs

A gift of any asset to charity can also be made without any capital gains tax being due. Suppose therefore that a person has a plot of land worth £50,000 which he wants to give to charity. Assume that the cost price of the land for capital gains tax purposes was £1,000. On disposing of the land to the charity no capital gain arises. In addition, the income tax relief mentioned above may also be claimed on the value of £50,000.

Carry-back of relief

Gifts to charities made in one tax year can be carried back to the previous tax year by election of the taxpayer. It would be beneficial to do this if, say, the taxpayer was within the higher rate of income tax in the previous tax year, but not in the tax year in which the gift is made. There is a detailed condition which applies; the broad effect of which is to ensure that the tax liability for the previous tax year fully covers the amount of tax relief claimed on carry-back of the gift.

Trusts and settlements

If when a trust comes to an end some or all of the trust assets pass to charity, no capital gains tax will be payable by the trustees in respect of those assets.

The inheritance tax exemption

Gifts to charities whether in lifetime or from a Will qualify for exemption from inheritance tax without limit. From 27 January 2009 this exemption extends to charities throughout the EU subject to scrutiny by HMRC of the particular charity concerned on a case by case basis.

Proposed reduced rate of inheritance tax

Those making a will which is to contain a gift to charity may be interested in an extension of the relief on death which is proposed to have application on and after 6 April 2012. It is proposed that where 10 per cent or more of the deceased’s net estate, after deducting inheritance tax exemptions, reliefs and the nil rate band, is left to charity the rate of tax applicable to the estate will be 36 per cent in place of the normal 40 per cent rate. Whilst this will be an additional incentive to leave property to charity on death, it must be recognised that it will not offer any real benefit to the other beneficiaries under the will.

For example, with an estate of £2 million, the inheritance tax due after deducting the nil rate band is £670,000 at the 40 per cent rate. The net estate after tax is therefore £1.33m. To achieve the 36 per cent tax rate, 10 per cent of the estate over the nil band (£167,500) will need to be given to charity so that the remaining taxable estate will be £1,507,500. After deduction of 36 per cent tax on that figure (£542,700), the estate available to the other beneficiaries will be £1,289,800. This compares with £1,330,000 if all the estate less 40 per cent inheritance tax had been left to those beneficiaries.

Deeds of variation

Where someone receives a legacy under a will, and he or she wishes to give part of that legacy to charity, it was at one time thought that this could be done by a deed of variation of the will to achieve both the charity exemption on the death in respect of the gift and also gift aid income tax relief on the same amount to the person making the variation. Unfortunately it has been held by the tax tribunals that no gift aid tax relief can be claimed as the inheritance tax reduction counts as a disqualifying benefit to the donor.

However the position is different if the gift by the will is a specific bequest of quoted shares or land, and that bequest is varied. In such a case if all or part of the bequest is redirected to charity by a deed of variation, this will enable inheritance tax charity relief to be available on the death (so long as the variation is made within two years of the death) and it will also amount to a qualifying gift of the asset to the charity for income tax purposes. Income tax relief will then also be available to the donor. For the purposes of the income tax relief, the amount of the gift is its value less the amount of the inheritance tax relief achieved by the variation.

FOR GENERAL INFORMATION ONLY

Please note that this Memorandum is not intended to give specific technical advice and it should not be construed as doing so.  It is designed to alert clients to some of the issues.  It is not intended to give exhaustive coverage of the topic.

Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.