Tax savings can be made by donating to charity both in terms of income tax and capital gains tax.
With the introduction of the additional rate of tax at 50 per cent on income of more than £150,000 and a reduction in personal allowance of £1 in every £2 of income earned over £100,000, people are looking at tax-efficient ways to give money to charity.
If you are a higher-rate taxpayer, what can you do and how can you do it?
Donating to charity can help manage both income and CGT liabilities and many more high-income earners are considering this option. The move is attractive to people on incomes of between £100,000 and £112,950 whose marginal income tax rate is now 60 per cent because of the loss of their personal allowance.
Those who expect to earn a little more than £150,000 this year are also looking at charitable donations to avoid paying the top 50 per cent rate of income tax.
Wealthy individuals who earn some income in the UK but are non-domiciled might even give their UK income to charity to avoid paying tax in this country. Some investors are also planning to transfer their share portfolios to charities. This creates a double tax saving as donations to charity are also free of CGT.
Not only is Gift Aid one of the easiest ways for higher-rate taxpayers to give to charity tax-efficiently but it also allows the charity to reclaim the basic-rate income tax that is treated as being paid by the donor.
Also, if you pay higher-rate or additional-rate tax you can reclaim the tax between the higher or additional rate and the basic rate of tax. For example, if you are a higher-rate taxpayer and donate £10 to charity the gross value of the gift will be £12.50, of which you can claim back £2.50 yourself. You must keep a record of your Gift Aid donations and either reclaim the tax on your self-assessment tax return form or submit a P810 tax review form to HM Revenue & Customs.
You can give to charity directly from your pay or pension if your salary or pension is paid through the PAYE system and your employer or pension company is part of the payroll giving scheme. The donation is made before income tax is calculated. This means if you pay tax at 40 per cent and give £10 a month, you save £4 and the total cost of the donation to you is only £6.
To do this, you must authorise your employer to make donations to a government-approved payroll agency, which would then pass your donation to your chosen charities. Some agencies offer the facility of a cheque book or charity card that allows you to make the payments yourself from your designated payroll agency account.
However, if you want to give anonymously, the payroll agency can make the payment on your behalf and you do not need to tell your employer or pension company which charity you are supporting.
It is also possible to claim income tax relief if you give an asset to charity or sell it to a charity at a cut price. Among other assets, this includes listed shares and securities, authorised unit trusts, shares in an open-ended investment company and holdings in foreign collective investment schemes that are similar to AUTs and Oeics in the UK.
If you decide to give an asset to charity, add the market value of the asset to any costs associated with the gift and subtract any benefits you receive from the charity in exchange for the gift. You would subtract this net figure from your taxable income for the year the gift was made.
Similarly, if you sell an asset to a charity for less than its value, you take the market value, add any costs associated with the sale and subtract the sale price. This amount is then deducted from your taxable income in that tax year. For example, if you own a portfolio of shares worth £10,000 and are charged £400 by the broker for the transfer, if you receive no benefit in exchange for the gift you can deduct £10,400 from your total taxable income in that tax year, helping to reduce your income tax liability.
You can make a claim for income tax relief on your self-assessment tax return if you complete one. If not, you would need to write to your tax office and tell them about the gift or sale and the amount of relief you are claiming. HMRC will either change your tax code or issue you with a refund. You would need to keep records of the gift or sale to provide to HMRC should you be asked to do so.
Another advantage of giving assets to charity is that you receive relief from any CGT due on the increase in the capital value as you are treated as making no gain or loss for CGT purposes.
Gifts made to charity are also excluded for IHT purposes. If you were to die within seven years of the date of the gift, the value would not be added back on to your estate when IHT is calculated. It would also not affect the £3,000 you can gift each tax year to non-charitable individuals or bodies.
If you decide to donate to charity to improve your tax position you must keep good records for at least 22 months after the end of the relevant tax year. For Gift Aid donations you should keep a note of the date, the amount and the charity. If you give assets to a charity you should keep the transfer documents. If the charity subsequently sells the asset then they can provide you with a certificate detailing the sale. These certificates do not need to take any particular form. If you sell assets on a charity’s behalf you should keep correspondence showing the its request for you to sell the asset and documentation showing the transfer of the proceeds of sale.
Lynsey Siveter is a solicitor in the probate wills & trust department at Barlow Robbins LLP