Tax Efficient Giving In The UK

Tax-efficient charitable giving in the UK can be achieved through several methods, allowing donors to maximise their donations while also minimising their tax liabilities.

Here are some common strategies:

Gift Aid – income tax relief for individuals

This is perhaps the most well-known method of tax-efficient giving in the UK. Gift Aid allows UK registered charities to reclaim tax on donations made by UK taxpayers. This means that for every pound donated, the charity can claim an additional 25 pence from the government. It is a way to boost the value of donations at no extra cost to the donor.

To qualify for Gift Aid, the donor must be a UK taxpayer and must have paid enough income tax or capital gains tax to cover the amount the charity will reclaim. Donations can include gifts of money, sponsorships, and even items sold at charity auctions.

Taxpayers at the higher 40% or additional 45% tax rates benefit from additional income tax relief in either the year of donation or the previous tax year (whichever is more beneficial), and this is claimed in their Self-Assessment returns. An alternative, if you are an employee, is to Give As You Earn by making gifts to charity through your payroll which can give a bigger tax saving.

Gift Aid – corporation tax relief for companies

In the UK, companies can also participate in Gift Aid, but it works differently from individual Gift Aid donations. Instead of reclaiming tax on donations made by individuals, companies can claim tax relief on certain donations they make to charities.

Companies can usually claim tax relief in their Corporation Tax returns. The amount of tax relief will depend on the company’s Corporation Tax rate and the value of the donation.

If you run a company, you may wish to consider introducing a payroll-giving scheme for your employees.

Tax reliefs on donating qualifying investment assets instead of cash

Instead of donating cash, you can donate assets. Gifts of the following assets qualify for a particularly generous relief on the full value of those assets so, if you are a 45% tax payer, you will achieve a 45% tax relief on the value of the asset gifted:

• Listed shares and securities (including AIM listed)
• Units in authorised unit trusts
• Shares in an Open-Ended Investment Company (which are often used as tax-efficient vehicles used by High Net-Worth Individuals)
• Interest in certain foreign collective schemes
• Qualifying interests in land

As an added benefit, you won’t have to pay Capital Gains Tax (CGT) on any uplift in value to the date of the gift to the charity.

Gifting chattels (such as works of art)

Chattels have their own peculiar tax regime since disposals of such assets are usually exempt from capital gains tax. Accordingly, gifts of chattels to charities do not currently benefit from income tax relief. There are a limited number of circumstances where other reliefs may be available, however:

Gifts of pre-eminent objects: If you donate an object of pre-eminent quality or national importance to a UK museum or gallery, you may be eligible for certain tax incentives. These incentives can include a reduction in your income tax, CGT, or inheritance tax (IHT) liability. Such donations can be made either during your lifetime or through your will.

Conditional Exemption: If you own objects of national, scientific, historic, or artistic importance, you may be able to place them under conditional exemption from inheritance tax. This means that the tax on the value of the chattel may be deferred until it is sold or leaves the UK. If the chattel is donated to a qualifying institution, the tax may be waived altogether.

Charitable considerations around legacies made on death

Legacy giving, also known as leaving a gift in a will, is a common practice in the UK where individuals include charitable donations in their estate planning. If at least 10% of the net estate is left to charity, the inheritance tax rate on the remaining estate may be reduced from 40% to 36%, which reduces the effective cost to the estate of the charitable gifts.

These gifts can be in the form of money, property, or assets and are typically designated to a charity or cause that the individual supports. You may wish to make the legacy contingent upon certain conditions, such as the charity continuing to fulfil a specific purpose.

HMRC do also accept legacies of certain assets to the nation in lieu of inheritance tax liabilities.

There are also some more complex tax planning ideas around using ‘double dip’ tax planning arrangements one could also explore.

Charitable Trusts

You may also wish to set up your own charitable trust, either during your lifetime or on your death. Gifts into such trusts can qualify for the gift aid scheme, meaning you can still benefit from income tax relief and the trust reclaims this from HMRC under the gift aid scheme, giving it more funds to give to charity.

They have the advantage of being able to give you anonymity and privacy, if you wish to structure them in such a way. Additionally, if you do not wish to run them yourselves, you can appoint others to administer the trust on your behalf, following your wishes as to which types of charity/ies can benefit from the trust.

Such trusts also give you more control and ability to maximise your income tax relief position of putting the funds into the trust, independently of when is a good time for the money to then pass out of your charitable trust to the charities, and in the meantime the funds in the trust can grow in a tax-efficient environment within the trust.

Donor-Advised Funds (DAFs)

DAFs are becoming increasingly popular in the UK and are a halfway house towards having your own charitable trust. They allow donors to make a charitable contribution to a fund, receive an immediate tax benefit, and then recommend grants from the fund over time. This can be particularly useful for donors who want to take advantage of tax benefits immediately but may not have decided on specific charities to support.

Additional tax planning for non-UK domiciles

If a non-UK domicile makes a remittance to a UK charity which qualifies for Gift Aid, this will not constitute a taxable remittance. A helpful concession for those trying to manage their tax position on non-UK assets under the complicated remittance regime.

These are just some general ideas which may be applicable to you. The best solution often involves a holistic approach, and we would always advise taking advice specific to your circumstances before taking action on any of the above. We would be happy to advise you further if that would be welcome, and always offer an initial chat free of charge to see how we can best help.

For more information, please contact Krista Woodman at krista.woodman@ballardsllp.com

Disclaimer. This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.