Now that preparing self-assessment tax returns is in full flow, our article this month covers arguably under-used, however potentially very beneficial, tax reliefs around charitable giving by individuals during their lifetime.We will be covering a few of the main tax reliefs available for charitable giving, including:
- Gift Aid
- Payroll giving
- Gifts of assets to charities
‘Gift Aid’ is the term given to the relief available to individuals in respect of any qualifying donation to a charity or other body treated as a charity, provided the person making the payment provides it with a Gift Aid declaration. Gift Aid relief also extends to gifts to:
- the Trustees of the National Heritage Memorial Fund;
- the Historic Buildings and Monuments Commission for England (‘English Heritage’);
- the National Endowment for Science, Technology, and the Arts; and
- ‘Community Amateur Sports Clubs (CASCs)’.
Currently charities or CASCs located in the UK, EU or the EEA can qualify for charitable tax reliefs in the UK. The Spring Budget 2023 announced that this will change so that only those that come within the jurisdiction of the High Court in England, Wales or Northern Ireland, or the Court of Session in Scotland will qualify for UK charitable tax reliefs. For CASCs, it will change the location condition so that the CASC must be based in the UK and provide facilities for eligible sports in the UK.
This measure took effect from 15 March 2023 for any charity or CASC that has not asserted their status for charitable tax reliefs. For non-UK charities and CASCs that had asserted their status for charitable tax reliefs by 15 March 2023 there will be a transitional period until April 2024. From April 2024, all non-UK charities and CASCs will no longer be eligible to claim UK charitable tax reliefs.
We would recommend that anyone currently making charitable donations to non-UK charities that are benefiting from gift-aid check what status the charity will have from April 2024.
For a donation to qualify for Gift Aid relief, donors must provide the charity with a ‘Gift Aid declaration’. Declarations may be provided orally and electronically, as well as in writing.
A valid declaration must:
- contain the name and home address of the donor;
- name the charity;
- identify the gift or gifts to which the declaration relates; and
- confirm that those gifts are to be qualifying donations for Gift Aid.
Retail Gift Aid
Some charities or CASCs raise funds by selling donated goods such as clothes, either at a shop, or as an occasional activity carried out at a charity auction. Donations of goods for sale in this way do not qualify for Gift Aid because Gift Aid applies only to gifts of money. However, a charity or CASC may offer to act as an agent for its supporters and sell goods on their behalf in the hope that the owner will donate the sale proceeds. Any donation of the sale proceeds, less any commission charged, could then qualify for Gift Aid. This type of arrangement is often called ‘Retail Gift Aid’ and will often result in the charity/CASC providing you with a gift aid declaration once the items donated have been sold, including a summary of the proceeds received for the sale of the items donated.
Tax relief under Gift Aid
A qualifying donation is treated as paid after deduction of basic-rate tax and the individual’s basic-rate limit is increased by the amount of the donation grossed up at the basic rate for the year in which it is made.
Thus, where basic-rate income tax is 20%, a donation of £800 is treated as a grossed-up amount of £1,000. In the charity’s hands, a qualifying donation is treated as an annual payment from which basic-rate tax has been deducted, thus entitling the charity to reclaim that tax. The charity therefore receives £800 from the donor and a further £200 from HMRC. In effect, the value of the donation to the charity is increased by 25% by virtue of the tax repayment.
Because the basic-rate band for the year is increased by the grossed-up amount of the donation, a donor liable at the higher rate gets relief on the grossed-up amount of the donation, at the difference between the higher rate and basic rate. The higher-rate limit is similarly increased to allow relief at the additional rate.
An individual can elect to treat a qualifying donation as having been made in the previous tax year. The election must be made on or before the submission of the self-assessment return for that previous year and, in any event, before 31 January following that year. In effect, therefore, it will only be donations made in the period from 6 April to the following 31 January which may be carried back in this way.
It should be noted that if gift aid donations are made where the basic-rate tax relief obtained by the charities is more than the individuals income tax liability for the relevant year, the shortfall is payable by the individual, to HMRC. Care should therefore be taken for taxpayers on lower income when making gift-aid donations.
If charitable donations are made as part of arrangements to obtain certain financial advantages from a charity, this will taint the donation, and tax relief will not be available.
Under payroll giving, an employee makes a charitable donation by way of a deduction from their gross salary. In this way, immediate tax relief is given at source at the employee's marginal tax rate. As the scheme applies only for tax purposes, no relief from National Insurance contributions is due.
There is no limit on the amount of the permissible deduction, but the deductions must be made under the terms of a scheme which, at the time the sums are withheld from the employee, is approved (or is of a kind approved) by an officer of HMRC.
Gifts of assets to charitiesTax relief is available for the gift by an individual of a qualifying investment to a charity.
The donor is given an income tax deduction for the full market value of the qualifying investment at the date of the gift, plus incidental expenses of transfer, less any consideration or benefit received.
The following are qualifying investments for this purpose:
- shares or securities that are listed or dealt in on a recognised stock exchange;
- units in an authorised unit trust;
- shares in an open-ended investment company;
- an interest in an offshore fund; and
- a freehold interest or leasehold interest in land and buildings in the UK.
In addition to the above income tax relief, relief is also available for capital gains tax purposes. The market value rule for capital gains tax does not apply and, unless the consideration exceeds the base cost, the disposal takes place at no gain/no loss. This means that the proceeds are treated as being an amount equal to the base cost of the asset, and the charity takes on the individuals tax base cost of the asset.
Inheritance TaxLifetime gifts to charities (or registered community amateur sports clubs) are generally exempt from IHT whether during lifetime or on death. If the value of the gift to the charity is less than the loss in value of the donor’s estate, the exemption is not restricted. The exemptions relating to charities will not apply to any gift if the donor does not part with his whole interest in the gift transferred or if he retains some benefit that affects the enjoyment of those to whom it is given.
SummaryMaking lifetime gifts to charities can provide notable tax benefits for both the individual making the gift, as well as to the charity, in addition to the benefit provided to the charity of the gift itself.
To claim tax reliefs, it is important to ensure that the relevant paperwork is prepared and retained by the relevant parties, both in relation to being able to make a claim for relief, and also in the case of a HMRC enquiry.
Care should be taken to ensure that any gifts are not tainted, or where the donor retains an interest or benefit in the gift, as this can restrict or result in the loss of tax reliefs.
In respect of any Gift Aid claims to be included on self-assessment tax returns, we will require Gift Aid declarations before these are added.