Tax is often not a driver for charitable giving, and so tax advice is not always sought when making charitable donations. However, in practice the tax reliefs can be generous, and we recommend that you consider the most tax efficient way to make any larger donations.
Cash gifts made personally to UK charities can qualify for Gift Aid. For each £1 donated, the charity can claim 25p from HMRC at no extra cost to the donor, which increases the amount available for use by the charity.
Higher rate and additional rate taxpayers can also personally claim income tax relief on the amounts donated to charity. This relief is given by extending the individual’s basic rate tax band in the year the donation is made, so that more income is taxed at 20% rather than 40% or 45%.
This relief is claimed on an individual’s annual personal tax return, usually in the tax year that the gift was made. It can be possible to ‘carry back’ donations made between 6 April and 31 January so that tax relief is available in the previous tax year.
Before making a gift, it may be sensible for spouses to discuss who is better placed to make it. If one pays tax at a higher rate it could be more efficient for them to make the donation.
NOTE OF CAUTION: If the Gift Aid claimed by the charity on a donation is more than the individual donor’s personal tax liability for the relevant tax year, the donor will have to pay the tax shortfall to HMRC, so large personal donations should be considered carefully. Where this applies, for example because the individual donor has relatively low taxable income, it may be preferable for the donor not to make a gift aid declaration in respect of the donation.
Many charities are willing to accept donations by individuals of assets rather than cash, for example property or quoted shares. Although no Gift Aid tax relief is available to either the individual or the charity in this scenario, a gift of a qualifying asset still provides valuable tax reliefs. The value of the asset gifted is deducted from the donor’s taxable income in the tax year in which the gift is made, reducing the amount of income subject to tax. In addition, where the asset is worth more than its original cost, the asset can be given to the charity free of capital gains tax.
Leaving money to charity when you die is another way to donate. Subject to specific conditions being met, broadly where an individual leaves more than 10% of their net estate to charity on their death, the IHT rate that applies to the rest of their estate could be reduced from 40% to 36%. The calculation can be complicated. We recommend advice is taken about exactly how the charitable legacy is drafted in the Will to ensure this reduced IHT rate will apply.
Volunteering time or advice is of course tax-free and is also highly valued by charities.
Donor-advised funds (DAFs) are a philanthropic fund established under an umbrella charity that administers the fund on behalf of the donor. Community Foundations and the Charities Aid Foundation (CAF) offer this type of structure.
Having a DAF allows donors to make charitable contributions at the right time for them allowing immediate tax benefits, whilst the DAF distributes grants and donations from the fund over time at the direction of the donor.
Donor-advised funds are an increasingly popular giving vehicle in the UK because they offer many of the benefits of having your own charitable foundation without the administrative burden and they can be more cost-effective as well.
Alternatively, you can establish your own foundation. This allows the most flexibility and control for the donor and is often a way to involve several members of a family in the philanthropic activities.
An important step for the foundation will be applying to be registered as a charity with the Charity Commission and we recommend tax and legal advice is taken before embarking on this.
Donations made by a company do not qualify for Gift Aid relief but can still provide tax relief from corporation tax. The same tax principles apply whether the board of directors decides on the donation or the staff select the charity they would like the company to support.
Tax relief is provided to a company for ‘qualifying donations’, such as cash donations to a UK charity, by providing a deduction against the company’s total taxable profits in an accounting period.
Qualifying donations in a period can reduce a company’s profits to £nil but excess donations will not provide any relief to the company. There is not scope to carry forward excess donations to the next accounting period.
Companies can also allow staff to spend time within their contracted working hours volunteering for a good cause, and this should have no tax implications.
There are two particular traps that donors can unintentionally fall into which create unexpected tax liabilities by simply making a donation:
We are always happy to have a discussion in relation to your philanthropy. Please do get in touch if this would be of interest.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
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