Gifting To Charities
With many clients, who are fortunate to have wealth above their expected requirements, conversations over time can lead to philanthropy, which can involve actively participating in charitable events and/or generously providing financial assistance to charities.
I recently ran 45 miles non-stop in aid of the Somerset Community Foundation via the Old Mill charitable fund. The process of raising money for charity was, for me, an extraordinary experience and certainly one of life’s memorable moments – albeit my legs for a few weeks were a bit stiff.
Giving something without reward and seeing the positive impact the funds provided to the various charities, has had a lasting effect. One of which is now my active involvement in running the Old Mill charitable fund. Due to the generosity of many we managed to raise just under £2,500.
2nd March 2022
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Jonathan Orchard See profile
Deciding to gift money to charity can be a sensitive subject as clearly, if one passes wealth to charitable causes, it falls outside of future family wealth. So, it’s important to be realistic around affordability, family circumstances, and ideally, any significant charitable giving should always form part of one’s longer-term financial plan.
However, from experience, we have found that for those who do wish to engage in philanthropy during their lifetimes, the impact can be profound, life-affirming and rewarding. Whilst it’s quite common for many of us to pass some funds to charities via our wills, on death, ‘bringing forward’ these legacies during one’s lifetime can have many added benefits. The major one, of course, is the ability to see the positive impact of charitable giving during your lifetime.
There are also tax benefits to gifting, albeit, for many, this will not be the driving force behind the decision.
1) Gift Aid
The most recognised charitable tax relief is called ‘Gift Aid’. It’s likely that you will have been asked to tick this box when making donations to charity in the past. In short, by completing this box, provided you pay tax at the Basic Rate, the charity can reclaim an additional 25% of your donation from HMRC.
For higher rate and additional rate taxpayers (40% & 45%), it’s also possible to claim a reduction in your personal tax bill via your tax return.
Example:
A donation of £10,000 would be topped up to £12,500 for the charity under the scheme and would allow a reduction of personal tax as follows:
- 40% taxpayer = £2,500
- 45% taxpayer = £3,125
In this instance, for a 45% taxpayer, the net cost of the gift is £6,875.
It‘s important to record all the gifts you have made, and if you have missed any in previous years, you are allowed to declare gifts for the last 4 years. The tax relief can be claimed via self-assessment or by completing HMRC form P810.
However, be aware that you must pay enough Income Tax for the charities to claim Gift Aid. A donation will generally qualify if it’s not more than four times what you have paid in tax in that tax year. So, if your income reduces significantly, but say regular gifting is in place (where you have previously declared Gift Aid) there could be an issue.
2) Donating listed shares, land or property directly to a registered charity
An often-overlooked area is that you can claim Income Tax relief on the value of listed shares, land, or property, plus any associated costs, if you donate directly to a registered charity. This is available by deducting the value of the donation from total taxable income. This also allows you to avoid any Capital Gains Tax (CGT) liability.
If the charity can’t accept the direct donation of shares or property, it can still be possible to sell them, on behalf of the charity, and pass across the cash proceeds. This should still provide all the various tax benefits mentioned above, but it would be important to keep records of the gift and the charities request.
Example:
An individual has £50,000 worth of shares that have capital gains of £20,000 applying, and they are a 45% Income Taxpayer. They wish to create a named fund in the Somerset Community Foundation by donating these shares. A stockbroker charges £500 to help transfer them across.
The individual would receive Income Tax relief on £50,500, thus saving £22,725 in Income Tax. Furthermore, they have avoided CGT at 20% (assuming they have used their CGT allowance up), equating to £4,000. Therefore, the net cost to them of the donation is £23,775.
3) Gifting to charities on death
If this is still the preferred option, there are valuable benefits of passing wealth to charities on death. If you leave at least 10% of your net estate to a recognised charity, this may reduce the rate of Inheritance Tax (IHT) paid by your estate to 36% instead of 40%. This can mean that the distributed estate to your family increases, and more is given to charitable causes.
The following notes explain some of the factors that need to be considered.
- The net value of your estate is the value of your taxable assets, less qualifying debts, exemptions, nil-rate band and any other reliefs or liabilities.
- A qualifying charity is one recognised by HMRC that has been granted a charity reference number.
If, by chance, your IHT planning does not qualify your estate for the 10% lower rate, your beneficiaries can arrange an instrument of variation to increase the charitable donation to an appropriate level to secure the lower IHT rate of 36%.
The rules are complicated in all but the simplest circumstances, so do talk to your financial planner if you want to consider introducing this feature into your estate planning.
Whilst many individuals will want to consider philanthropy for various personal reasons and motivations, it’s always important to consider the financial impact and claim all the available tax reliefs. If you would like to discuss gifting to charities in any further detail then email jonathan.orchard@om.uk