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Tax Relief on Charitable Gifts

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Introduction – Tax relief & charitable gifts

It is reported there has been a “steady decline” in the total amount of charitable donations. This is despite the availability of healthy charity tax relief.

This article will focus on precisely what reliefs are available in the UK for the philanthropically minded taxpayer.

The nature of the donation – whether one is gifting cash or assets – will dictate the position for both the person making the donation (the donor) and the charity itself.

We consider three potential types of donor:

  • Individual;
  • Company; and
  • Hybrid

This note will concentrate on cash gifts rather than the donation of assets.

Personal Donation

General

This is by far the most common type of charitable donation in the UK is cash.

It is possible for the taxpayer to obtain gift aid on the donation, meaning the charity can effectively claim an additional 25% bonus on the donation. This is as long as the donor has paid enough income tax and / or capital gains tax to ‘frank’ the gift.

Personal Tax Computation

Where an individual has made this ‘Gift Aid declaration’ (see Appendix one for the requirements for Gift Aid) then this has consequences for their annual tax computation.

The basic and higher rate tax bands are extended by the grossed up charitable donation. The effect of this is that this part of their income taxed at the lower rates is increased.

So, for example, a higher rate taxpayer who makes a gift of £10k – which is worth £12.5k when grossed up – is likely to save at least £2.5k in tax.

Similarly, if this person is paying tax in the 45% band, the higher rate threshold will also be extended by £12.5k. This means that there would be a further 5% benefit of £625.

There are circumstances where this benefit might be increased.

Circumstances where relief may be increased

This level of tax relief may be further increased if the individual, before taking in to account the charity relief:

  • Suffers from a reduced personal allowance as their income is in excess of £100,000;
  • Theyearn more than £150,000.
  • Parents who suffer the High-Income Child Benefit Charge. (This claws-back Child Benefit that has been paid where one of the couple earns over £50,000 and either gets Child Benefit)

In addition, for pension purposes, where adjusted net income exceeds £150,000, then the Annual Allowance is tapered away from £40,000 to a minimum of £10,000. However, a charitable gift can increase the amount an individual can contribute into their pension during a tax year.

Corporate Donation

Introduction

A cash donation to a charity by a Company will reduce your corporation tax.

Essentially the amount you donated is deducted from your business profit pre-tax, therefore reducing the amount of tax your company pays.

There are various types of contributions that your company can make. Some of these are:

  • Cash
  • Equipment
  • Trading stock
  • Land, property and shares in another company
  • Employee time

It is also possible that a charity can be funded by sponsorship.

However, for the purposes of this note, we have concentrated on cash donations.

Restrictions

There are some restrictions on payments made. The payment won’t qualify if:

  • It is a loan that will be repaid by the charity;
  • The payment is on the condition that the charity buys property from your company or anyone connected to it; or
  • The Payment is a distribution of company profits i.e. dividends.

Claiming the Relief

The deduction is simply claimed on the corporation tax return for the period in which the funds were donated.

The relief will be worth 19%, which is the prevailing rate of corporation tax.

Hybrid

It is also possible for an individual to personally lend an amount to the Company. The Company then uses these funds to the charity and claim the relief.

Once the company has made a profit (and after corporation tax has been paid) the Company then repays the individual. The refund of the loan is free of any further tax.

However, whether this makes sense, bearing in mind they will miss out on personal charity reliefs, will depend on the circumstances.

If you have any queries about tax relief on charitable gifts, or tax in general, then please do get in touch.

 

APPENDIX ONE – GIFT AID CONDITIONS

 

Perhaps, unsurprisingly, the Gift Aid declaration comes with a number of conditions that need to be satisfied.

These are as follows:

  1. The recipient charity must be a registered charity in the UK, the EU, Norway or Iceland;
  2. The declaration must be made. This is usually done by completing a written declaration but it can, in theory, be oral;
  3. The declaration must include specific details of the donor. This includes their name, address, name of the charity, and a confirmation that the donation should be treated as subject to gift aid; and
  4. The donor also needs to confirm they pay enough UK tax such that it can cover the tax to be claimed back by the charity.

 

 

Tax relief on charitable gifts added 6 February 2020

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