I have the pleasure in working with a number of clients who choose to make charitable donations on a regular basis or have made significant gifts to charity following receipt of a lump sum payment.
In making charitable donations to support causes or organisations that you feel passionately about, many of the tax benefits associated with making gifts to charity can be forgotten.
The following provides a gentle reminder of some of these.
Charitable transfers or use of charitable trusts via a Will
It is possible to reduce your inheritance tax liability by leaving money or assets to charity in a Will.
The relief works by subtracting the value of the donation from the value of the estate before inheritance tax is calculated on the balance – so no inheritance tax is payable on the amount gifted.
This might also reduce the inheritance tax rate payable on the taxable estate by 4% from 40% to 36% if the value of the donation represents more than 10% of the net estate value.
Donations via the Will can be made directly to a charity or the Will could direct the legacy into a Charitable Trust.
The way the 10% discount is applied can be complex, so professional help when writing your Will is important.
If a Charitable Trust is used, then a letter of wishes will need to accompany your Will. This will help inform the trustees of your wishes regarding who, and what sort of charitable causes, should be supported.
For those that want to retain control over their wealth during their lifetime this may well be an attractive option. However, donors have the opportunity to improve their charitable objectives by making gifts using Gift Aid.
Gift Aid was set up by the UK government in 1990 to allow charities and community amateur sports clubs (CASC) to reclaim tax already paid on monetary donations they receive. It allows charities to claim an extra 25% for every £1 donated.
Donors also benefit because the value of the donation immediately comes out of your estate for inheritance tax purposes, and the value of the gift helps to reduce your liability to income tax. For those who have higher or additional rate tax liabilities, the difference between the tax you’ve paid on the donation and the amount the charity received can be claimed back via self assessment.
For example, if an individual donated £100 to their chosen charity under Gift Aid, the charity would receive £125 in total. A higher rate tax payer could reclaim additional tax relief of 20% on the gross donation (£25) and an additional rate tax payer could claim 25% (£31.25) via self assessment.
Gift Aid donations work in a similar way to personal pension contributions in that they effectively extend the basic and higher rate tax bands. This means less income is subject to higher or additional rates of tax. For some, Gift Aid contributions might be able to help regain personal allowance or child benefit.
However, there are a couple of points donors should be aware of when gifting under this scheme. Your donations from the current and previous year combined must not be more than 4 times what was paid in tax in the previous year.
Another stipulation is that you must have been charged with Income Tax and/or Capital Gains Tax for the year of donation which is at least equal to the tax treated as deducted from your donation. If more than one Gift Aid donation has been made in the tax year they must be added together. If you have not paid sufficient tax to cover the Income Tax deducted from your Gift Aid donations then you will owe the amount of the difference in tax to HMRC.
Payroll Giving schemes, offered by employers or pension providers, work slightly differently in that any donations you make through the scheme will be taken before income tax is calculated. Employed individuals will still pay National Insurance on the amount donated.
Charitable trust set up in lifetime
A Charitable Trust is a structure which can be set up by an individual or small group of people who want to distribute some of their assets or income to charitable causes. Usually those individuals who create the trust act as its trustees, alongside other members of family or friends.
It is possible for trustees to grant money with conditions, or to support specific projects which are more closely aligned to their charitable interests. For this reason, Charitable Trusts provide a vehicle for donors who wish to have greater control and involvement over who benefits and how money is gifted on an ongoing basis.
The Charitable Trust can continue after its founder’s death. It is possible to gift a legacy to the Charitable Trust in your Will, which will also be tax-free. The trustees will continue to distribute funds according to the guidelines set out in the Charitable Trust’s constitution. This way you can make sure that your chosen causes continue to benefit.
Individuals can make donations into the trust and are able to claim Gift Aid (as described above).
The trust will also be able to take advantage of many tax benefits. It will not pay tax on its income or gains if these are used for charitable purposes, nor will it pay corporation tax, inheritance tax, or business rates (a cap of 20% applies to any non-domestic property which is used for charitable purposes) if it eventually runs its own office.
The Charitable Trust will only pay VAT if it starts to supply a significant amount of products or services that are subject to VAT. This is unlikely if activities are limited to making grants or donations to other charities.
In England and Wales, supervision comes from the Charity Commission. The trust needs to be registered and is required to publish an annual report and accounts. Whilst this should not generally be a significant administrative burden, the initial set up and ongoing costs should be weighed against the benefits described above.
The Financial Conduct Authority does not regulate Will-Writing, Tax, Trusts and Estate Planning.