Giving to charity – good for the soul but what about tax?

In the final part of our series looking at the fundamental principles of estate planning in the UK, it is time to shine the spotlight on how the tax system in this country rewards individuals who give to charity, both during their lifetime and as legacies on death.

The reliefs cover a plethora of taxes and this article seeks to highlight the benefits and, in one case, the possible unintended negative effect of a particular tax relief.

Lifetime giving

There are a variety of tax reliefs’ available, dependant on what is given to a charity by the individual donor. There are however, a number of elements which are constant, outlined below.

• The gift must be made to a charity registered with the UK Charity Commission or, if based outside the UK, be subject to the jurisdiction of an member of the European Economic Area and comply with the relevant domestic legislation for charities.
• The gift must be made as a genuine donation and not in return for benefits or goods.
• For Inheritance Tax (IHT), unlike gifts to individuals (Potentially Exempt Transfers) or gift to a family Trust (Chargeable Lifetime Transfers), a gift to a charity, both in cash or kind, is an exempt transfer and immediately reduces the value of the donor’s estate.  This is the case irrespective of other tax reliefs being available.

Gift of cash

The much used Gift Aid system is the most well-known of the tax reliefs offered and gives a tax benefit to both the donor, in the form of income tax relief and to the receiving charity. At its most generous, the cost to the donor of a cash donation is £55 for every £100 received by the charity.

In order to claim Gift Aid, the charity must obtain a declaration from the donor that they are a UK tax payer and that, in order for the charity to claim its Gift Aid relief (worth an additional 25 percent of cash donations received), the donor needs to have paid sufficient income tax and/or capital gains tax (CGT) to cover the charity’s claim. Where the donor’s tax liability is insufficient to ‘frank’ the donation, further tax must be paid to HMRC by the donor.

An individual can claim tax relief either in the year the donation is made, or in the previous tax year where the donation is made before the tax return for that year is filed with HMRC.

Gifts of UK land 

• IHT:  a gift of an interest in UK land attracts income tax relief in the form of a deduction against the donor’s income for the tax year in which the gift takes place.  The effect of this is the same as for Gift Aid above, reducing the net cost to the donor to as low as £55 for every £100 value of land gifted.
• CGT: a transfer of an interest in UK land for nil consideration, often attracts a liability to CGT, calculated by reference to the value of the land at the time of the gift.  However, there is a specific relief available for gifts of UK land to charity such that neither a taxable gain nor allowable loss is deemed to have been realised
• Stamp Duty Land Tax (SDLT): as we are dealing with UK land, we should also consider SDLT. In the case of an outright gift, no SDLT liability arises as there is an absence of consideration. If however, the land had a mortgage secured and the receiving charity had agreed to take on that debt, this would be deemed to be consideration and SDLT may then be in point.

Gifts of investments

The income tax and CGT reliefs described above for gifts of land apply equally to gifts of the following categories of investment:

Listed shares and securities. While generally treated as unlisted for other tax purposes, AIM listed shares and securities are included within this category,

•  units in an Authorised Unit Trust (AUT),
•  shares in an Open Ended Investment Company (OEIC),
•  holdings in certain foreign collective investment schemes – generally schemes set up outside the UK that are similar to AUTs and OEICs.

Making the most of the reliefs available

As stated above, Gift Aid brings with it an obligation to pay enough tax to cover the charity’s tax relief claim and can create additional tax payable by the donor. Where a substantial gift of cash is being planned, it may be appropriate to make the donations in stages over a number of tax years.

When a gift to charity of UK land or investments is contemplated, one should consider how best to structure that gift, to maximise the benefits to both the charity and to the donor. This is particularly where the charity has no planned use for the asset other than a sale to the highest bidder.

Where the asset is standing at a gain, the sale of which would give rise to a CGT liability or the use of capital losses that may have arisen elsewhere, a direct gift of the asset should be made to the charity. A sale by the charity will not create a tax liability.

Conversely, if the current value of the asset is lower than its cost, selling the asset first will generate the loss for the donor and the cash proceeds can then be gifted to the charity under Gift Aid. Some charities will arrange the sale, acting as the donor’s agent, to facilitate this effect but a sale to the charity itself is specifically excluded.

Charitable legacies

The only tax to consider where an individual bequeaths a legacy to a charity in their Will, is IHT and it is here that we have an unintended consequence. Generally, where an individual’s estate is subject to IHT, this is charged at the flat rate of 40 percent.

Since 2012, this rate is reduced to 36 percent where at least 10 percent of the total estate has been left to charity. So the estate benefits not only for the exemption on the value given to charity but the rate of tax applied to what is left is reduced. One would hope that this incentive has increased both the number of individuals planning charitable legacies, but also the value going to good causes. Good news all round one might think…

However, unlike gifts to individuals, the value of which is aggregated with the estate on death, if made in the previous seven years, there is no such recognition for equivalent gifts made to charity. So a philanthropically minded individual in later life would not be blamed to think of cancelling a sizable gift to charity during lifetime and instead have it dealt with under the terms of their Will.

Surely this cannot have been the policy objective and one hopes that charities do not suffer a delay in receiving much needed donations as a result.