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The basics of giving

The press and airwaves have been occupied by some heated debate on the Government’s proposals to impose a cap on the annual amount that can qualify for income tax relief, including the amount that can be donated to charity and qualify for income tax relief.

The limits put forward are £50,000 or 25 per cent of income, whichever is the greater. It is these limits that are causing disquiet among charities and philanthropists.

The Government justification for the changes appears to centre on two key arguments. The first is that, in its view, some so-called charities are not. Well, most would say this hardly justifies legislation that would detrimentally affect all charities. A more focused approach would seem to be more appropriate. The second is that, despite the “goodness” of charitable donations, every £1 of tax relief that is generated by virtue of a charitable donation is £1 that is not available to the Government to spend on causes such as the National Health Service and the armed forces.

The Government backs up this argument with some compelling figures showing the extremely low effective tax rates paid by the highest earners – contributed to by charitable donations. It also states a cap on tax-deductible charitable giving applies in many other countries.

Despite this, one could not rule out some amelioration of the provisions, say, a raising of the proposed cap and/or permitting some carry forward of unused relief.

While the debate rages, we thought we might revise the basics of relief for charitable giving.

We have drawn on Her Majesty’s Revenue & Customs’ guidance to do this.

There are a number of tax-efficient ways to give to charity as an individual. You might be able to claim some tax back using these methods. To claim these, the organisation you give to must be recognised as a charity for tax purposes by HMRC. You can check this by asking the charity to confirm it has an HMRC charity reference number.

If your donations are under the Gift Aid scheme, your chosen charity can also claim tax back (known as tax relief) from the Government.
Depending on the type of gift you make, you may have to make a claim to receive the tax relief (either on your self-assessment tax return or by contacting your own tax office).

Gift Aid is an easy way to help charities get extra money on your cash donations. Your Gift Aid donation is treated as if basic-rate income tax has already been deducted by the donor. Charities and community amateur sports clubs can then reclaim that tax from HMRC.

To make a Gift Aid donation, you must pay at least as much income tax (and/or capital gains tax) as the amount of tax reclaimed by the charity. This is currently 25p for every pound you donate.

Basic-rate tax is 20 per cent, so this means that if you give £10 using Gift Aid, it is worth £12.50 to the charity.
If you make a number of Gift Aid donations, you must pay enough UK tax on the total amount of those donations. If you do not pay enough tax, you may have to pay HMRC any shortfall in tax paid.

Of particular interest to those who would be affected by any cap on the amount that can be realised are the provisions for securing higher-rate and additional-rate relief.

Relief is available at the higher and additional rates provided the donation is made through Gift Aid.

It is important to note that a qualifying charitable donation under Gift Aid does not have to have its source in natural income. The source of the cash donated could be your capital. In addition, you can secure income tax relief if you

  • Give land or buildings in the UK or qualifying shares to a charity
  • Sell these to a charity at less than their market value

Qualifying shares include those listed on any stock exchange.

And where assets that are chargeable assets for capital gains tax are given to a charity any gains that would otherwise arise will not be taxed.

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