Charitable giving is seen as a ‘good thing’ and is supported by the UK tax system with various tax reliefs designed to encourage donations. As well as financially incentivising the donors, these reliefs also benefit the charities by increasing the value of donations.
This article looks at the various tax reliefs available to individuals.
Gift Aid
The most well-known tax relief for charitable giving is gift aid. An individual, when making a charitable donation, can sign a declaration that this is made within the gift aid system. This means that the donor has paid income tax or capital gains tax equivalent to the basic rate of income tax on the grossed-up donation.
For example, a donation of £80 is treated as a gross donation of £100 from which basic rate tax of £20 has been deducted. That £20 does not have to be paid to HMRC, but the charity can reclaim this amount from HMRC, so it receives £100 for an outlay of £80 by the donor. Higher and additionalrate taxpayers can also claim further tax relief on their donations through their self-assessment tax return. So, if the donor here pays tax at 40% they can, in effect, reduce their tax liability by a further £20. Note, however, that if the donor has not paid tax or has paid less than the tax treated as deducted, HMRC will demand payment.
Payroll Giving
Employers may operate a payroll giving scheme. This arrangement allows employees to authorise their employer to deduct an amount from their salary and pay this to a payroll giving agency, which then makes the payment (less their fee) to the charity or charities chosen by the employee.
Because the donation is deducted from salary before income tax is calculated, the employee receives immediate tax relief at their highest rate. The charity, in turn, receives the gross payment immediately and has a steady and predictable stream of income.
Capital Gains Tax Reliefs
As well as making gifts from income and receiving tax relief under the gift aid or payroll giving systems, there are tax reliefs for gifts of specific assets. The donation of shares, various securities and land to charity may attract significant tax advantages. Donors are potentially entitled to both income tax relief – by deducting the market value of the asset from their taxable income – and exemption from capital gains tax on any increase in the asset’s value between acquisition and donation. Alternatively, the donor could sell the asset, pay any capital gains tax and then make a cash donation to the charity under Gift Aid.
The differing approaches will have different tax implications for both the donor and the charity and will depend on the individual’s circumstances. There are also various conditions applicable to the capital gains tax relief, as well as anti-avoidance measures, so detailed advice should be taken. A further benefit to the recipient charity is that they do not pay stamp duty land tax (or the equivalent taxes in Scotland and Wales) on the acquisition of land or buildings, if certain conditions are met.
Inheritance Tax Relief
Legacies left to charity in a will are exempt from inheritance tax. Further, if an individual leaves at least 10% of their net estate to charity, the rate of inheritance tax on the remainder of their estate may be reduced from 40% to 36%, benefitting the other beneficiaries.
Conclusion
Perhaps a gift to charity and the act of philanthropy should be a reward in itself, but to its credit, the UK tax system encourages such activity. Donors must ensure that their chosen charity is registered with the Charity Commission or has recognised charitable status, and proper documentation and recordkeeping are essential. This is especially important for higher-rate taxpayers and those donating assets. Charities, in turn, must comply with HMRC requirements, but these requirements for both donors and donees are the basis of a comprehensive and supportive philanthropic environment.
Practical Tip
The ShareGift charity (www.sharegift.org) specialises in accepting small holdings of shares, particularly those which are not worth selling because that would cost more than they are worth. Shares from donors are pooled, and donations are made to various charities.