3 Tax Benefits of Charitable Giving

Once you are on track to achieve financial security for yourself and your family, you may be thinking about how you can give back.

Many financial planning clients list charitable giving as one of their goals. This not only allows you to help good causes, but can also help to reduce your tax bill.

This article looks at the tax reliefs available when you make gifts to charity and how these can work within your financial plan.

Use Income Tax Relief to Increase the Value of Your Gift

If you are a taxpayer, the charity can claim Gift Aid. For every £1 you donate, the charity can claim an extra 25p from HMRC, so your £1 becomes £1.25. This applies not only to standard donations, but also to entrance tickets to certain attractions if the organisation has charitable status.

The charity will need to take some details from you to be able to claim this relief. Your donations qualify, provided they do not exceed four times your tax bill for the tax year (income tax and capital gains tax).

If you make regular donations, please notify the charity if you stop paying tax or your tax bill reduces below the minimum level required to offset the claim.

If you haven’t claimed Gift Aid for donations in previous years, you can request Gift Aid to be applied to donations made in the previous four tax years, provided you paid sufficient income or capital gains tax in each of those years to cover the claim.

Higher and additional rate taxpayers can claim further tax relief through Self-Assessment. This means that a gift of £100 could cost you as little as £60 if you are a higher rate taxpayer, or £55 if you are an additional rate taxpayer. This is assuming the full gift falls within your highest tax band.

Alternatively, ask your employer about Payroll Giving. This means that charitable gifts can be donated directly from your wages, without the deduction of tax. This is a simpler solution for you and for the charity, although not all employers offer it.

You can also claim income tax relief if you donate assets such as property or shares to a charity. This works by deducting the value of the donation from your taxable income.

The relief would normally be claimed via your tax return. However, if you don’t usually complete one, you can claim by contacting HMRC.

Reduce Capital Gains Tax Through Strategic Gifting of Assets

Usually, when you sell or gift assets (such as shares or a property that is not your main residence), you will pay Capital Gains Tax on any notional profits you make.

So if you buy a property for £100,000 and give it away when the value is £200,000, you could face a tax bill on the gain (minus any costs, reliefs and exemptions that apply), even though you haven’t made any actual profit.

Gifts to spouses and gifts of business assets are usually exempt from this, as the tax is effectively deferred until they dispose of the asset.

Gifts to charity are exempt from Capital Gains Tax. So if you have a property or share portfolio that carries large gains, you might want to consider gifting the asset rather than cash.

Even better, when the charity sells the asset, it will not pay tax on the gain, provided the proceeds are used for charitable purposes.

You can still claim income tax relief on gifts of assets, which means that the total relief can potentially be substantial.

In terms of gifting assets tax-efficiently, there is one notable exception. Investment bonds can be gifted (fully or by ‘segment’) without immediate tax liability on the gains.

The recipient can then encash the bond as they wish, and will pay tax on any gains at their own marginal rate. This can make bonds an efficient choice for making gifts to individuals, particularly if the recipient pays a lower rate of tax than the donor.

However, while charities are exempt from most taxes, they may still be liable for tax on gains from investment bonds. As a result, these are typically less tax-efficient to donate than other assets, such as cash, shares, investment funds, or property.

Help Reduce Inheritance Tax

Once your annual exemptions are used, most gifts of capital will drop out of your estate after seven years. If you die within that time, the gift is added back into your estate and could increase your Inheritance Tax bill. The amount of tax you may be liable for depends on several factors, including your Nil-Rate Band (NRB), Residence Nil-Rate Band (RNRB), and any applicable tapered relief. To understand how these apply to your individual circumstances, we recommend speaking with one of our advisers, who can guide you through the process and provide tailored information

Gifts to charity (as well as political parties and any other organisations considered to be for national benefit) are immediately outside your estate for tax purposes.

Additionally, if you donate at least 10% of your estate to charity via your Will, your remaining taxable estate will receive a 10% discount on the rate of Inheritance Tax paid. This reduces the tax rate from 40% to 36%.

When you crunch the numbers, this often means you can support charities in your Will without significantly reducing the amount available for your other beneficiaries.

Not only does charitable gifting reduce Inheritance Tax, but it also means that more of your money can go to the people and the causes that are important to you.

Our Top Tips for Charitable Gifting

1. Choose an issue that aligns with your personal values, whether this is human rights, animal welfare, medical research, sport, arts and culture, the environment, or something else entirely.
2. Consider the organisation carefully. A smaller, local charity might be able to make a more immediate impact with your donation. A larger organisation will have more influence and spending power to make bigger changes.
3. Make sure your chosen organisation is registered with the Charity Commission in England and Wales, or the appropriate governing body if the charity is based elsewhere.
4. Do the appropriate due diligence, and be wary of fraud.
5. Avoid making gifts purely for tax reasons, and never give away more than you can afford.

Please don’t hesitate to contact a member of the team to find out more about financial planning and charitable gifting.

The value of your investments and pensions (and any income from them) can go down as well as up which would have an impact on the level of benefits available