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Tax efficient giving.

This Charity Tax brief explains how you can make the most from the donations that you receive. 

Gift Aid

The charity can claim an extra 25p for every £1 the donor gives. Higher or additional rate taxpayers can also reclaim up to an extra 25p or 31p per £1 donated.

The donor must pay enough Income Tax and/or Capital Gains Tax (CGT) to cover the Gift Aid claimed on all of their donations.

The donor must make a Gift Aid declaration for each charity to which they want to donate. Declarations can include all donations from the last four tax years and can cover future donations.

The donor must tell the charity if they haven’t paid enough tax to cover the Gift Aid or they may have to pay the difference.

Higher and additional rate tax payers can make an additional reclaim of tax either through their Self-Assessment Tax Return (or by asking HMRC to amend their tax code).

Donating from wages or pension (Payroll Giving)

Donations are made before tax is deducted from the donor’s income. The donor can give £1 to charity at a cost of; basic rate taxpayers: 80p, higher rate taxpayers: 60p or additional rate taxpayers: 55p.

Donations can be made straight from wages or pension if the donor’s employer, company or personal pension provider runs a Payroll Giving Scheme.

Compared with Gift Aid, the charity does not have the administrative burden of collecting declarations and the donor gets automatic tax relief at source. The overall tax saving is the same as with Gift Aid but donors need to be mindful that the same net donations are worth less to the charity. For example, a higher rate taxpayer could either donate £1 under Gift Aid or £1.25 from their payroll – in both cases the charity would receive £1.25 at a net cost of 75p to the donor

Loaning funds to a charity

30% of the amount loaned to the charity is deductible from the lender’s taxable income in the tax year of the loan.

The loan must be held for at least 3 years.

The charity must have fewer than 500 employees and gross assets of no more than £15 million.

There are various other qualifying conditions.

Gifts to the nation

30% of the value of the object (20% for companies) is deducted from the donor’s tax bill for the year.

No Capital Gains Tax (CGT) is payable on the disposal, potentially saving 28% on the gain.

The gift must be a “pre-eminent object” (e.g. a work of art).

An expert panel must agree the value of the object.

The donor can indicate which charity they would like to donate the object to, but ultimately the Secretary of State for Culture, Media and Sport will decide based on the advice of the expert panel.

Business

Gifts of certain plant and stock, and sponsorship payments to local charities can be deducted from taxable profits.

Donating land and buildings, property or qualifying shares.

The market value of the asset is deductible from the donor’s taxable income for the tax year of the gift, a tax saving of 20-45% of the value of the gift.

No CGT is payable on the disposal, potentially saving 28% on the gain.

Hence, Gift of shares/land can be more tax efficient than Gift Aid.

The donor can claim the income tax relief on their Self Assessment tax return.

If the donor sells assets to a charity at less than market value, the difference between the sale proceeds and market value can be treated as a donation. If the asset is sold at the donor’s tax base cost, no CGT will be payable either.

Legal documentation of the donation must be kept by the donor for 22 months following the end of the tax year of the donation. The donor can also claim tax relief if they sell the asset directly on behalf of the charity as long as they keep records of the charity’s request to do this.

As an example, the highest rate taxpayer who bought shares in a listed company 20 years ago for £1 decides to give them to a charity when they are worth £10,000. This potentially saves £4,500 off their current year tax bill, plus £2,800 CGT they would have paid if they had sold the shares. Hence the gift of £10,000 to the charity only costs £3,500 to the donor. The charity can then sell the shares tax free.

Leaving to charity in a will (legacies)

Gifts to charities are deductible from the value of the donor’s estate, saving up to 40% Inheritance Tax (IHT).

In addition, the rate of IHT on the remaining estate can be reduced from 40% to 36% if 10% or more of the net estate (after the nil rate band and other costs) is left to charity.

Increasing charitable gifts may financially benefit the remaining beneficiaries.

Donations in a will can either be cash or assets

The beneficiaries may change the will by completing a deed of variation (within two years of death) in order to donate more to charity. This can be used to make enough donations to achieve the reduced rate of IHT.

For example, say an individual has an estate worth £475,000 (after costs) and leaves £10,000 to charity and the rest to his niece. The nil rate band is £325,000. The remainder to the niece would be subject to IHT (40% rate) of £56,000 leaving her with £409,000. If the niece instead made a deed of variation to leave £15,000 to charity, she would pay IHT (36% rate) of £48,600 leaving her with £411,400.

Where:

Employees are transferred temporarily to work for a charity; or

Employees volunteer during work time.

The company can deduct the employee’s costs as normal business expenses. The company must continue to remunerate the employee under Pay As You Earn.

How we can help

Our team can advise you or your charity on tax efficient giving and various other tax aspects. Our services include:

Bespoke Gift Aid workshops for both in-house fundraising and finance teams

Advice on setting up and operating Gift Aid and other tax efficient giving Tax and VAT health-checks

Luke Savvas

Tax Partner - Charity Team

T | +44 (0)20 7556 1460

E | savvasl@buzzacott.co.uk

Jon Daley

Senior Tax Manager - Charity Team

T | +44 (0)20 7556 1292

E | daleyj@buzzacott.co.uk

You might also be interested in… Tax planning and advice for charities.

Our dedicated not-for-profit tax team advises all kinds of organisations. We work closely with charities, religious institutes, academies and schools, further and higher education organisations, INGOs, membership organisations and social businesses.

Take advantage of our sector experience to make sure you’re claiming all relevant tax reliefs and exemptions. Then enjoy directing the greatest possible funds towards the causes you care about.

Our tax and audit specialists work as one team and have trained as charity experts from day one. So you can count on regular communication, industry insights and an annual charity tax update after the Chancellor’s Budget. We also offer tax update seminars and bespoke fundraising workshops to help you keep up to date with the latest information.

Tax advice to help charities and their trustees

  • Review use of Gift Aid and other tax-efficient ways to boost income
  • Review group structures for tax efficiency and set up tax-efficient trading subsidiaries
  • Assess tax consequences of new contracts and agreements
  • Review VAT exemptions
  • Advise on dual-qualifying charities (a tax-efficient structure connecting a UK and US charity)
  • Guidance on property transactions 
  • Advise on employment tax issues

Taxes and giving: getting it right

We also help charities, trusts and organisations use Blackbaud Grantmaking™ software to make and monitor grants and streamline their admin. To stay compliant and make the most of your resources, learn about grant management.

Download these useful resources:
Calculating partial exemption
Fundraising events: VAT and Direct Tax