Tax efficient charitable giving during Covid-19
However, with fundraising events cancelled or postponed, and many people experiencing financial pressures which reduce their ability to make charitable donations, a recent survey by the Institute of Fundraising has found that charities are anticipating a loss of up to 48% to their voluntary income as a result of the Covid-19 crisis. The government has announced various packages of support for the sector but, despite this, many charities will be unable to maintain (let alone expand) their services. Support from those who are in a position to make charitable donations has never been more important.
This note provides an overview of the UK tax treatment of donations to UK registered charities so that you can choose ways to donate which are not only tax efficient for you, but also your chosen charity. The tax implications of your donation will differ depending on the form and timing of the donation, the level of your income and capital gains, and whether you wish to share any potential tax reliefs with the charity.
Cash – Gift Aid
Gifts of cash to UK charities can benefit from Gift Aid. The gift must be in cash, so gifts of cryptocurrencies or other investments do not qualify for Gift Aid.
The idea behind Gift Aid is that the UK government should repay all of the tax paid on money donated to charity, but the mechanics are complex. The charity receives part of the benefit of Gift Aid, and the donor receives the remainder.
Benefit to charity
It is assumed that the donor has paid basic rate income tax on the donation, so the value of the donation is “grossed up” accordingly. For example, if you give £100 (the “actual donation”), it is assumed that you have already paid 20% tax on the money and it represents £125 (the “grossed-up donation”) of your pre-tax income.
The charity can reclaim the basic rate tax from the UK government, which is 20% of the value of the grossed-up donation. This equates to 25% of the value of the actual donation.
You must sign a Gift Aid declaration to confirm that you have paid an amount of income or capital gains tax (CGT) in the tax year of the donation, which is at least equivalent to the amount being reclaimed by the charity. For example, if the charity is reclaiming £25 on a donation of £100, your Gift Aid declaration confirms that you have paid at least £25 income tax or CGT in the tax year.
Benefit to higher or additional rate taxpayer
Higher rate taxpayers (paying income tax at 40%) and additional rate taxpayers (paying income tax at 45%) can reclaim the higher and additional rate income tax paid on the grossed-up donation. As the charity has already reclaimed the 20% basic rate, this means that:
- higher rate taxpayers can reclaim 20% of the value of the grossed-up donation (this equates to 25% of the value of the actual donation); and
- additional rate taxpayers can reclaim 25% of the value of the grossed-up donation (this equates to 31.25% of the value of the actual donation).
Example – donation of £100 in cash
|Taxpayer||Actual donation||Grossed up donation||Gift Aid claimed by charity||Tax relief for donor|
|Basic rate taxpayer||£100||£125||£25||None|
|Higher rate taxpayer||£100||£125||£25||£25|
|Additional rate taxpayer||£100||£125||£25||£31.25|
It should be noted that you must actually have paid higher or additional rate income tax equal to the tax relief being claimed (and any CGT paid is not taken into account). For example, where your income is only just above the additional rate limit (currently £150,000), part of your donation may be eligible for additional rate relief and part for higher rate relief.
If you have insufficient income in the relevant year to take full advantage of these reliefs, you may in some circumstances be able to claim back the difference between the basic rate of CGT (10%) and the higher rate (20%). This is obviously less beneficial than an income tax relief claim.
You have the option to elect to be treated as if you had made the donation in the previous tax year (i.e. the relief can be carried back one year). This may be relevant where you have a large tax liability in one tax year but do not make a charitable donation until the following tax year.
Restriction on benefits
Your donation will not qualify for Gift Aid if you have received benefits in exchange for the donation, unless these are very low value (the precise level of acceptable benefit depends on the value of the donation). For example, you could not make a donation of £100 in exchange for a ticket to a charity gala.
It is sometimes possible to ensure that part of the donation qualifies for Gift Aid by splitting the donation into two parts – e.g. the ticket price and the “true” donation. You could then claim Gift Aid on the “true” donation. This is a complex area, and advice should be taken to ensure that you can properly claim Gift Aid relief. It should also be noted that, where a charity event has been cancelled due to Covid-19, HMRC has issued guidance confirming that, if a person due a refund (on, for example, the ticket purchased for the event) decides to donate this to the charity, Gift Aid will be available (subject to certain criteria).
Listed shares and other qualifying investments
Donations which are not cash donations do not qualify for Gift Aid, and charities cannot claim any tax relief on them. However, there are other tax reliefs available to donors.
The UK government offers particularly significant relief for donations of listed shares (including shares listed on AIM and recognised foreign stock exchanges), land and some other qualifying investments – principally, units in an FCA authorised unit trust, shares in a UK open-ended investment company or an interest in an offshore fund. This note will refer to “qualifying investments” generally, although in practice these will usually be listed shares.
Two types of relief are available.
- CGT: you do not have to pay any CGT on the donation of qualifying investments to charity. Normally, any disposal of shares standing at a gain (whether by sale or gift) would trigger a liability to CGT, but this does not apply to charitable donations.
- Income tax relief: your taxable income in the tax year of the donation will be reduced by the market value of the qualifying investments (there is no grossing-up involved). This means that higher-rate taxpayers can claim income tax relief of 40% on the value of the qualifying investments, and additional-rate taxpayers can claim income tax relief of 45% on the value of the qualifying investments.
If your income tax bill is low in the year that you donate the qualifying investments, you may not be able to claim the maximum relief available. It is not possible to roll the income tax relief forwards or backwards, although you could consider making the donation over a number of tax years, to maximise the relief available.
Example – donation of listed shares
|Taxpayer||Tax relief for charity||Income tax relief for donor||CGT relief for donor|
|Basic rate taxpayer||None||20% of value of qualifying investments||No CGT payable|
|Higher rate taxpayer||None||40% of value of qualifying investments||No CGT payable|
|Additional rate taxpayer||None||45% of value of qualifying investments||No CGT payable|
Unlisted shares and cryptocurrencies
Gifts of unlisted shares and cryptocurrencies do not qualify for Gift Aid or income tax relief, but you will not have to pay any CGT on the donation.
It is nearly always preferable to sell the assets and donate cash to the charity, to make use of Gift Aid. However, this is worth considering carefully, as selling the assets will trigger a CGT charge of (usually) 20% on the gain on the assets. Note that some assets such as residential property and carried interest attract a higher rate of CGT of up to 28%. Capital gains qualifying for entrepreneurs’ or investors’ relief attract a lower 10% rate.
Gifts of chattels (such as art) to charities do not currently benefit from particularly generous tax treatment because, although the gift itself will not be subject to CGT, there are no provisions allowing a donor to set off the value of the gift against their personal UK tax liability.
Specific reliefs are available where important heritage objects or objects that are pre-eminent because of their national, scientific, historic or artistic interest are offered to the nation (for example, donated to a public museum) or are put on public display for parts of the year.
Gifts on death
Gifts made directly to UK charities under a testator’s will are not subject to inheritance tax, resulting in a tax saving of 40%.
Furthermore, since 6 April 2012, a reduced rate of inheritance tax has applied where 10% or more of a deceased’s taxable estate is left to charity. Under the current headline inheritance tax rate of 40%, a reduced rate of 36% will be applied to the balance of the estate not passing to charity.
Where a person dies and their will does not contain the necessary drafting to ensure that this relief is available, it would be open to the beneficiaries to alter the will for inheritance tax back to the date of death. This would be done by a deed of variation and may be particularly worthwhile where a will leaves, say, 9% to charity and an extra 1% given under a deed of variation will then bring the charitable legacies up to 10%, and bring the rate of inheritance tax on the remaining part of the estate down to 36%.
Donors with connections to other countries
Many donors will have links to other countries, and this will make their tax position more complex.
UK resident non-UK domiciliaries paying tax on the “remittance basis”
Non-UK domiciled individuals who are taxed in the UK on the remittance basis will typically want to use non-UK income or gains to make charitable gifts (rather than using up their clean capital, or income or gains which have already been taxed in the UK).
If you are paying tax on the remittance basis, you can make a donation of untaxed income or gains from your non-UK account to the non-UK account of a UK charity. This does not qualify as a remittance, so should not trigger a tax charge. Furthermore, as you have made a donation to a UK charity, you will also qualify for the tax reliefs set out in this note.
Donors paying tax in multiple countries
The matter of charitable tax reliefs becomes more complicated where the donor is subject to tax not only in the UK but also in another jurisdiction. For example, US citizens living in the UK are subject to US taxes on the basis of citizenship and UK taxes on the basis of residence. In that case, it will be necessary to take specialist advice in both jurisdictions to ensure that tax relief can be obtained in both jurisdictions.
Donations to non-UK charities
In April 2012, UK charitable tax reliefs were extended so that they also apply to gifts made to charities established in the EU, Norway or Iceland (and, from 2014, the Principality of Liechtenstein), provided that such charities have exclusively charitable purposes under English law. In practice, however, very few non-UK charities have taken advantage of this as the relevant legislation also imposes various conditions which must be satisfied by the non-UK charity in question and because of differences in what constitutes a charitable purpose across Europe. In October 2019, the Supreme Court held in Routier and another v HMRC  UKSC 43 that HMRC’s refusal to grant inheritance tax relief on a gift of UK assets to a Jersey charity (with exclusively charitable purposes under English law) under the deceased’s will was incompatible with EU law principles on the free movement of capital. We have written a separate detailed note on the Routier case.
Whilst the implications of the Routier decision are potentially significant for cross-border giving, until the full implications of the judgment become clear, we would not advise relying on this case as a planning tool for tax efficient giving to non-UK charities. Instead, the solution is to make the gift indirectly, via a UK charity which is able and willing to give the money to the non-UK charity. A UK charity can make a payment to a non-UK body provided that the UK charity takes adequate steps to ensure that the money will be used for purposes which are charitable, as a matter of UK law, and provided that those purposes fall within the objects for which the UK charity was established.
If you would like further information or specific advice on making charitable donations, please contact us.