THE TAX BENEFITS OF GIVING TO CHARITY

GIFT AID

Donating through Gift Aid means that charities can claim an extra 25p for every £1 you donate, and normally it won’t cost you any extra. Gift Aid can normally be claimed on most donations by way of you ticking a box or confirming you wish to claim Gift Aid when making the donation. Any donation you make under Gift Aid is deemed to have been made net of basic rate tax of 20% recognising that you have already paid Income Tax on the cash donation that you are making. For example, if you made a donation of £80 then the charity would be able to reclaim an additional £20 from HM Revenue & Customs (HMRC) to represent the 20% basic rate tax that you have already paid.

One of the requirements of donating under Gift Aid is however that you have paid sufficient tax in the tax year to cover the donation made. If you have not paid sufficient tax to cover that which the charity reclaims from HMRC then it is your responsibility to pay over the difference to HMRC. If for example most of your investments are in ISAs and your pay or pensions are covered by your personal tax allowance then you may not be paying any tax. If you make charitable donations under Gift Aid then in the above example you will also have to pay the £20 over to HMRC. The changes to the taxation of investment income and dividends introduced in 2016/17 may mean that more people fall into this category as dividend tax credits, for example, will no longer be available to cover the basic rate tax withheld. If you fall into the above category then charitable donations can of course still be made, but they should not be made under Gift Aid.

If you find that you have not paid sufficient tax to cover a donation made under Gift Aid but know that you paid enough tax in the previous tax year then there is the ability to “carry back” that donation and treat it as if it had been paid in the previous tax year. This can be a useful planning tool. If, for example, you will only be a basic rate taxpayer in 2016/17, but had tipped over into the higher rate tax bracket in the year ended 5 April 2016 then you can carry back the donations. One important point is that the donation must be made before the Tax Return is submitted and you must make the appropriate entry on your Tax Return.

There is an added incentive for higher rate taxpayers (or additional rate taxpayers) to Gift Aid any donations to charities since they can reclaim an additional 20% (25% for additional rate taxpayers) from HMRC by making the appropriate entries on their Tax Returns or notifying HMRC accordingly.

Such taxpayers may also therefore want to consider their position before the end of the tax year on 5 April since if they are on the verge of tipping over into the higher rate of tax or additional rate of tax then making a Gift Aid donation before 5 April sufficient to bring them back into the lower tax bracket could be beneficial. This is also applicable for those taxpayers with taxable income approaching £100,000 since personal allowances start to be withdrawn for those with income in excess of £100,000 meaning that a marginal rate of 60% tax can apply.

GENERAL EXEMPTION FROM INHERITANCE TAX (IHT)

Any individual can make donations to charities during their lifetime (which generally includes most museums, universities and community amateur sports clubs) and such ‘gifts’ are exempt from IHT (whereas most other gifts to individuals can have IHT implications unless the donor survives for seven years after having made such gift).

A similar exemption is available on death whereby any amounts left to charities in your Will are deducted from the value of your Estate before IHT is calculated. This can give rise to a take saving of 40% of the amount given to the charity.

REDUCED RATE OF IHT

A perhaps less well known benefit of leaving amounts to charity in your Will is the ability to pay IHT at a lower rate than usual when a sufficient percentage of the Estate on death is left to charity.

If at least 10% of the ‘net’ value of your Estate is left to charity (which can be made up of a number of different charities), the rate of IHT payable on your Estate is 36% rather than 40%. In broad terms, the ‘net’ value of your Estate is the value of your assets on death, after deducting any liabilities, IHT reliefs and exemptions and the nil rate band.

A 4% reduction in the IHT rate may not sound like a lot but if you have a net Estate of say £500,000 liable to IHT, there could be a reduction in IHT of £20,000.

It is possible that the Will can be varied within two years of the death to ensure that at least 10% of the Estate is bequeathed to charity, if the Will wasn’t amended prior to death.

The above is for general guidance only and no action should be taken without obtaining specific advice.