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Charity donations: a useful tax planning tool

In the current economic climate many charities are finding it increasingly hard to encourage people to make donations. Ruo Wu considers the options available to donors.

As we all continue to feel the pinch, and with no immediate end in sight to these austere times, is there anything charities can do to encourage people to keep donating?

The prospect of tax reliefs for the donor is one way to encourage donations. In most cases the methods allow the donor to make the gift to charity more valuable without any additional personal cost.  This article looks at some of the basic methods available.

Gift Aid

Most people are aware that by making a Gift Aid declaration when donating, the charity receiving the donation will be able to claim the basic rate tax previously paid by the donor on the amount donated. So, on a donation of £100 the charity can claim 20/80 x £100; or £125.

The bit donors forget is that, if they pay sufficient tax at a higher rate, they too can claim some money back from HMRC. A higher rate payer (40%) can claim back the balance of the tax previously suffered on the amount donated. So using the example above, the higher rate payer can claim back (40 – 20%) on £125; which is £25.

This means that a higher rate taxpayer can effectively donate £125 to a charity at a personal cost to themselves of £75.

Gifting assets

Another alternative is to gift assets to a charity. Donors can claim tax relief when giving certain assets such as shares and land to a UK charity. Unlike cash donations under Gift Aid, all the tax relief on gifting assets can be claimed by the donor.

The tax relief available on gifting assets has two elements to it:

(i) capital gains tax relief; and
(ii) a possible claim for income or corporation tax relief.

With the capital gains tax relief, if the donor makes an outright gift of an asset to a UK charity (or sells the asset for less than was originally paid) then the disposal is treated as having been made on a no gain/no loss basis. This means that even if the asset has increased in value, there will be no capital gains tax charge for the donor when making the donation.

The donor may also be entitled to income or corporation tax relief if the asset gifted is a qualifying investment. Qualifying investments include: shares or securities listed on a recognised stock exchange, holdings in certain collective investment schemes and qualifying interests in UK land and/or buildings (if the whole of the interest is being gifted).

The relief allowed is the market value of the qualifying investment at the date of gift, plus any incidental costs of making the gift, less any consideration paid by the charity.

This can be a useful tax planning tool if you have a qualifying asset with a large capital gain in it that you no longer use or need, and a suitably sized income against which to set the income tax relief. The gift of the asset to charity will not trigger a capital gains tax charge and, at the same time (assuming all the relief requirements are met), should generate income tax relief equal to the value of the asset gifted.

Inheritance tax planning

The final simple alternative uses bequests to charity. Where death occurs after 6 April 2012 and a donor leaves at least 10% of the value of their net estate to a registered charity, a reduced rate of inheritance tax (36% as opposed to 40%) will apply to the rest of the estate. This reduced rate is applied following the deduction of any exemptions, reliefs and the availability of the nil-rate band.

As with Gift Aid, this allows the donor to make a donation at less cost to himself. For example, if the donor dies leaving an estate of £425,000 then the £100,000 taxable part of the estate (i.e. the excess over the nil rate band, currently £325,000) will potentially be taxed at 40%.

If the donor gifts £10,000 of that £100,000 to charity then the 40% rate will reduce to 36%. So in return for leaving a £10,000 donation, the donor will pay a 36% rate of inheritance tax on the remaining £90,000 to be divided between his beneficiaries. If no donation were made then £100,000 would be available to divide between the beneficaries, suffering a 40% rate of inheritance tax.

All of the above suggestions are very simple planning points and do not require any particular tax experience or knowledge on the part of the donor to claim the reliefs.  If you would like to discuss any aspect of the above, or a related matter, in more detail then please do not hesitate to contact either Ruo Wu or Sue Vandersteen.