The dawn of 2019 will have been seen by many as a chance for self-improvement – to take up a new hobby, to learn a musical instrument, to finally use that gym membership. For some, 2019 is a chance to continue the generosity felt during the festive period and to consider donating to charity. So how can we, as advisors, help our clients to maximise their donations whilst giving in a tax-efficient manner?
Gift Aid
The most often encountered charity relief is Gift Aid, which was claimed by 45% of charities registered with HMRC in 2016/2017. Gift Aid is a government scheme designed to encourage individuals to donate to UK charities by granting tax relief (both to the charity and the donor) on donations of money. The amount of a cash donation received by the charity from an individual UK taxpayer is increased by 25%, while the taxpayer can also benefit. For example, Maurice gives £100 to a UK charity. First the amount of the gift is grossed up by the basic rate of tax (currently 20%), amounting to £125. The charity can then reclaim this additional £25 from the government. Assuming Maurice is a higher rate taxpayer and pays tax at 40%, he can also reclaim £25. If Maurice is an additional rate taxpayer, paying tax at 45%, he can instead reclaim £31.25.
As one might expect, there are stringent conditions to ensure that this relief is not misused, not least that donors must not receive significant benefits from a charity in return for their gift. The government has announced a simplification of the benefit rules, replacing the current mix of monetary and percentage thresholds that charities must consider when determining the value of benefit they can give to their donors without losing the entitlement to claim Gift Aid tax relief on donations received. To summarise, for gifts and payments made on or after 6 April 2019, the benefit threshold for the first £100 of the donation will remain at 25% of that amount. Charities can offer an additional benefit of 5% to donors on the amount of the donation that exceeds £100. The total value of the benefit that a donor can receive remains at £2,500.
Historically, Gift Aid has only been available on gifts of money i.e. cash. However, we understand that HMRC agreed towards the end of last year that cryptocurrency donations can be treated as cash donations for Gift Aid purposes. It is also worth noting that Gift Aid is available on gifts to a donor advised fund or family foundation. Provided the entity is a charity, Gift Aid should be claimed at the point at which the donation is made, meaning any onward donation will already have benefited from Gift Aid i.e. the amount available is 125% of the amount originally donated.
Payroll Giving
Many employees are able to take advantage of Payroll Giving (or Give As You Earn). This scheme allows anyone who pays UK income tax on earnings to give regularly to charity, on a tax free basis, by direct deduction from their earnings. The donations are deducted before tax so each £1 given by a basic rate taxpayer will only cost 80p (for a higher rate tax payer it is 60p and 55p for an additional rate taxpayer). For a higher or additional rate taxpayer, this is the only way to pass on the 40% or 45% tax to charity. The scheme also benefits charities as it provides regular income, helping them to budget and plan ahead more effectively.
Corporate Donors
There is a different regime for corporate donors, whereby charitable donations are deductible from the company’s total profits in the year of donation.
Non-Cash Gifts
Some clients may have significant assets but little available disposable money, so what about gifts other than cash? These individuals could benefit from a separate charitable relief for gifts of qualifying investments and qualifying land. Where gifts comply with the rules, the entire value of the gift can be set against the donor’s taxable income for the year. “Qualifying investments” will include most quoted investments, both in the UK and abroad. For “qualifying land”, the gift must usually consist of freehold land or buildings in the UK. If the land is owned by more than one person, all of the co-owners must give all their interests in the land to the charity for any of them to qualify for relief. The relief is also subject to anti-avoidance rules.
When a donor gives away any asset to charity (not just qualifying investments or land), such a gift is free of capital gains tax. There is a clear advantage for the donor where he or she has assets standing at a large unrealised capital gain. For a charity, this can be helpful because it might receive a gift that a donor may otherwise have been disinclined to give. It may be simpler for the donor to sell the property and gift the proceeds, for example if a charity prefers not to accept gifts of assets and does not want the hassle of arranging a sale. One option is for the individual to make the donation and then arrange the sale on behalf of the charity, with the charity being responsible for costs.
Anti-Avoidance
Without negating the positive aspects of these reliefs, it is important to be aware of the tainted donation rules. These apply where a donor has planned arrangements designed to give themselves a financial advantage. In this case all income tax and capital gains tax reliefs are withdrawn and an additional income tax charge may also be imposed.
Cultural gifts scheme
This scheme is designed to encourage UK taxpayers, both individuals and companies, to donate pre-eminent objects to be held for the benefit of the public or the nation. In exchange, the donor’s liability to income tax, capital gains tax or corporation tax is reduced by 30% of the agreed value (for individual donors) or 20% of the agreed value (for corporate donors) and relief is either available for the year of the gift or (for an individual) can be spread across a maximum of five tax years. This may be relevant where a donor wishes to make a gift of an object to a UK museum during their lifetime (rather than on death) whilst also benefitting from this tax relief.
Inheritance Tax
Last but not least, we turn to inheritance tax relief, namely that gifts to charities on death are exempt from inheritance tax. For many, a legacy is a chance to remember a favoured cause – indeed, it is estimated that the annual income created by legacies forms 15% of all voluntary income received by British charities.
Not only are gifts to charities on death exempt from inheritance tax, they can have an impact on the rate of inheritance tax applicable to the rest of an individual’s estate. When a minimum amount (broadly speaking, 10% of the net estate value) is given to charity, the rate of inheritance tax is reduced from 40% to 36%. This relief will be of interest to anyone planning to give a substantial part of their estate to charity. Even for those looking to make a smaller gift, there may be an overall tax benefit to increasing that gift, as the relief can increase the overall amount received by other beneficiaries
The future?
It is important to note that charity tax reliefs are not set in stone. In 2018, the Charity Tax Commission called for evidence regarding potential improvements to charitable tax reliefs. Responses highlighted the complexity of many reliefs, inconsistent application, and the greater role that many charities now play in the delivery of public services. 2019 may be the year that sees signification reform to the current system of charitable tax reliefs.