Two main areas affected by the Budget statement are as follows:
1. Charitable Trusts Investing in Life Assurance
This is a major change announced in the Budget Note BN24 - Life Policyholder Taxation (see also section 7 of this Bulletin). With effect from 9 April 2003 trustees of charitable trusts will not have to pay tax on most UK policies and the tax charge on any foreign policies will be reduced to the basic rate.
At present most gains made on policies held by trustees of charitable trusts are strictly taxable on the donors to the charity who are entitled to reclaim the tax they pay from the charity. This is considered to be too onerous on all the parties - the donor, the charity (who may effectively suffer 40% tax) and the Revenue. Where the assessment is on the trustees (e.g. because the donor is dead), they are liable at the rate of 34%.
The proposed change to the law will switch the primary charge from the donor to the charitable trustees while at the same time reducing the tax payable on such gains to the basic rate. A basic rate credit will be available where the policy is a UK policy so that the charity will normally have no further tax to pay except where the policy is with a non-UK insurer.
The above does not affect general provisions governing charity investments - in particular it has not been suggested that Schedule 20 ICTA 1988, which includes the list of Revenue approved investments for charities, is to be altered. However, subject to verification that an investment bond is a suitable investment for a charity on other grounds, and in all cases where a bond is left to a charity under a Will (and continues in force after the death of the testator), the changes outlined above are welcome as they will bring the treatment of bond gains closer to the treatment of other investment income of charities. It must, of course, be borne in mind that an investment by a charity into a life assurance bond will not provide the charity with tax freedom on capital gains.
2. Giving to Charity Through the Tax Return
In his Budget in 2002 the Chancellor announced that, with effect from 2003/04 there would be new incentives to encourage taxpayers to give to charity when they make their annual self-assessment (SA) tax return. The main incentives announced were:
- advertising the facility on the tax return and making it easy for taxpayers to donate
- allowing higher rate taxpayers to carry back their portion of Gift Aid relief (18 per cent) to the previous year
- allowing taxpayers to nominate a charity to receive all or part of a tax repayment that is due to them.
Today the Budget Note BN34 confirms that the details of the scheme are still being developed and legislative changes will be introduced as required. It also confirms that the taxpayers who expect a repayment will be able to nominate on the SA return a charity to receive all or a specified amount of the repayment. The donation will be passed direct to the charity by the Revenue. The individual will be able to indicate whether Gift Aid should apply to the donation. This will be possible from April 2004 in SA returns for 2003/04.