Tax relief on charitable donations

Many of us are keen to support charitable causes, either during our lifetimes or by including bequests in our wills.

A number of tax incentives for giving to charity are made available to incentivise taxpayers to donate – Gift Aid being the most commonly used income tax relief. This article considers the various options available and the associated tax savings.

Tax relief on charitable donations during your lifetime

If you wish to donate cash to a charity during your lifetime, the Gift Aid scheme is particularly beneficial as it provides tax relief to both the charity and the donor, where the donor is a higher or additional rate taxpayer. Relief is available on donations to UK registered charities. After April 2024, taxpayers will not be eligible for UK tax relief on donations to EU or EEA charities and these entities themselves will be unable to claim Gift Aid.

As long as you are a UK taxpayer and sign a Gift Aid declaration, the charity is able to reclaim basic rate tax, which currently equates to 25p for every £1 donated (a donation of £100 provides a tax repayment of 20/80ths x £100 eg £25).

Before signing the declaration, you should satisfy yourself that the tax reclaimed by the charity will not exceed your income tax and capital gains tax liability in the year; otherwise you will be required to pay the shortfall.

If you are a higher rate or additional rate taxpayer, you can claim further income tax relief in respect of the gift, through your tax return or through your PAYE tax code, if you have one.

An individual’s tax relief on a cash donation to charity under the Gift Aid scheme can be advanced to the previous tax year. To do this, the cash gift must be made before the tax return for the previous tax year has been submitted and the tax return must be submitted on time. Care must be taken over the timing of the gift and the filing of the tax return for this relief and advice should be sought.

Tax relief is also available if you give certain qualifying assets to charity. These assets include:

• Shares or securities listed on a recognised stock exchange (including London and any recognised overseas stock exchange). AIM listed shares are also eligible.
• Units in authorised unit trusts and shares in open-ended investment companies.
• Freehold or leasehold interests in land in the UK.

You will receive income tax relief by deducting the market value of the asset (less the value of anything you receive from the charity in return) from your taxable income, through a claim in your tax return. The tax saved will be 20% for basic rate taxpayers, 40% for higher  rate taxpayers and 45% for additional  rate taxpayers.  Unlike cash donations under Gift Aid, charities are not able to claim tax repayments from HMRC on the gift of assets.

Ordinarily, the gift of an asset may give rise to a capital gains tax charge if the asset has increased in value but a gift made to a registered charity is exempt from capital gains tax.

Giving to charity in your will

Generally, inheritance tax is payable at a rate of 40% on an estate worth over £325,000. Gifts left to charity on death benefit from an exemption from inheritance tax. This exemption extends to gifts of any asset, including cash.

In addition, if 10% or more of your total estate is left to charity, a reduced inheritance tax rate of 36% will apply. The lower rate of tax has proved attractive to many people and has encouraged them to increase the amount given to charity. When the numbers are worked through, the lower tax burden can often mean that more is received by the eventual non-charity beneficiaries of the estate.

Long-term charitable giving

Donating to an existing charity may not suit everyone’s philanthropic objectives. Wealthier individuals who require a greater degree of control and flexibility over how their funds are used, and the causes that benefit, might decide to set up and fund their own charity instead.

Charitable trusts are often used, and once they are set up and registered, the reliefs mentioned earlier in this article will apply to any gifts made to the trust. Other  vehicles are a company limited by guarantee and a Charitable Incorporated Organisation.

Charitable trusts are established by a deed, which a solicitor will need to draw up. The deed will usually set out the objectives of the charity and the causes it will support, along with the names of the initial trustees. The trustees have overall responsibility for ensuring the charity meets its charitable objectives and its legal and reporting obligations.

Once the trust has been established, it should be registered with the charity commission and with HM Revenue & Customs (HMRC). This will ensure that the trust benefits from the tax exemptions available to charities. A solicitor or accountant can assist with these applications.

Depending on the size of the trust, it will need to file accounts and a return to the Charity Commission on an annual basis.

Setting up and running a charity does involve a certain degree of administration. However, with the right advice, this can be very rewarding and offer the chance to leave a lasting legacy that continues beyond your own lifetime.

Tax Relief for Donations from Non-domiciled individuals

A UK tax resident non-domiciled (non-dom) individual can receive tax incentives for giving to charity in the same way as an individual who is domiciled in the UK.

However, if you are a resident non-dom and you opt for the remittance basis of taxation, the gift of cash or assets from overseas to a UK charity may be treated as a remittance of income or gains to the UK and is therefore subject to an income tax or capital gains tax charge in the UK.

To prevent a remittance to the UK, and any associated tax charge, you may consider making donations to an overseas bank account of the charity concerned.

Those who give to charity are nearly always driven by a desire to help causes that are close to their own hearts, but there are many practical ways to make their gift/s. While some donors prefer to make one-off donations during their lifetime, others prefer to leave legacies in their wills or set up their own charities.

By understanding and maximising the tax reliefs available, there is potential for individuals to increase the amount their chosen charity receives, as well as reducing their own tax bills.

For advice regarding any of the options raised here, please speak to your usual Saffery contact or get in touch with David Humphrys.

Additional Resources:

Tax relief on charitable donations – Gov.UK