Can you support charities in crisis? - The financial benefits of charitable giving
People donate to charity for many reasons: interest in a cause, ‘giving something back’, reward for achievements and to take advantage of tax benefits. Whatever motivates the gift, donating to charity should be a positive experience for the donor and recipient alike.
A new report from UBS and PwC stated, ‘billionaires worldwide saw their collective fortunes hit a record high of $US10.2 trillion during the coronavirus pandemic’ with their ‘combined wealth jumping to 27% between April and July’. Ordinarily this would correlate positively with the amount of charitable donations.
However, according to the Charites Aid Foundation (CAF) ‘more than half of charities (53%) reported a drop-in donations; fewer than one in five (18%) reported donations had increased. Half of all charities surveyed (49%) advised they had sought or received some form of emergency grant funding to get them through the crisis.’
At the same time, ‘one in three UK charities (35%) reported a spike in demand for their services, an increase from 26% a month earlier. Amongst charities reporting an increase in demand, six in ten said it had increased by more than a quarter and one in four said demand was 50% higher than pre-crisis.
What are the tax benefits?
Some of the tax benefits associated with making philanthropic donations to registered UK charities include:
- Relief from higher and additional rate income tax
- Reclaim of your personal allowance if you have lost it due to high earnings
- Exemption from capital gains tax on the donated assets
- Immediate exemption from Inheritance Tax for donations made to charity
Income Tax Relief
When you make a cash gift to charity using Gift Aid, the gift is allowable for income tax relief, albeit one with a twist. While the basic rate of income tax is reclaimable, it is the charity which reclaims this amount, not the individual. This means, gift £800 to a charity and they will be able to boost this to £1,000 by applying Gift Aid.
There are more benefits for the higher or additional rate taxpayer; they are able to claim back the difference between higher or additional rate and basic rate tax on the value of any donation. For a 40% rate taxpayer, that means for every £1 donated 25p in tax relief can be claimed back.
Using the same example, a relievable gift to charity of £800 results in the charity receiving £1,000 and the donor receiving income tax relief of £200 if they are a higher-rate taxpayer - or £250 if they are an additional rate taxpayer - reducing the net cost of the gift from £800 to £600 or £550 respectively.
A word of caution
Those who donate more than four times the amount of your combined income & capital gains for the year; the HMRC will send you an additional tax bill if your chosen charity claims more tax relief than you paid in tax in the first place.
Reclaim of Personal Allowance
Here, charitable donations are an even better deal because your adjusted net income (ANI) (not the same as adjusted income for pension purposes) is deemed lower after making the gift, potentially resulting in an increased personal allowance (i.e., only if the donation reduces income falling in the £100k-£125k range) in addition to the normal reliefs listed above. Continuing the above example, the £800 gift would allow the charity to receive £1,000 and the donor a £400 income tax rebate, resulting in a net cost of only £400.
Inheritance Tax (IHT)
Charitable gifts are exempt from inheritance tax calculations as soon as you make them. Leaving part of an estate to charity can reduce, and in some situations, eliminate your Inheritance Tax liability. It can reduce the value of an estate so it falls under the ‘nil rate band’ exemption for inheritance tax (currently £325,000 per person plus £175,000 - if eligible - Residence Nil Rate Band- RNRB) — meaning no tax would be payable.
Assuming there is no RNRB and you leave a net estate valued at £350,000 (after any liabilities and debts have been deducted), inheritance tax is payable at 40% on £25,000 of that (£10,000) — the amount above the nil rate band of £325,000.
However, if you left £25,000 to charity, the figure would reduce to £325,000 and no inheritance tax would be due.
Bequest on Death
If you have an IHT liability, as well as the gift itself being free from IHT, your Inheritance Tax rate on the rest of an estate can be cut from 40% to 36%, if you leave at least 10% of your ‘net estate*’ (what is left after the nil rate band any debts or liabilities have been applied) to a charity.
*(the RNRB doesn’t apply to the net estate for charitable donations. It is still included when assessing whether the £2 million threshold has been exceeded for tapering purposes).
Leave something to charity in your will and it will not count towards the total taxable value of your estate. This is known as leaving a ‘charitable legacy’, by taking advantage of this tax break, you will be able to donate to a worthy cause and be rewarded by paying less inheritance tax than you would otherwise have done.
If you’re intending to leave to a worthy cause on death it might be worth speaking to an adviser to see the tax benefits of a charitable donation.
For example, if you expect have a ‘net estate’ (excluding RNRB) of £100,000 and were planning to leave £6,000 to charity, this represents 6%, leaving your estate with £94,000 before tax, with inheritance tax to pay of £37,600. (40% of £94,000)
If the gift is increased to 10% of your taxable estate - the total gift to £10,000 - the estate is reduced to £90,000 and the inheritance tax is reduced to £32,400. (36% of £90,000)
The estate leaving 6% to charity results in £56,400 for the heirs; the one leaving 10% is worth £57,600 – a £1,200 uplift simply by increasing the amount of charitable giving.
Capital Gains Tax
Capital Gains Tax may currently be only 10-20% on investments (excluding investment property), but it can still be disconcerting to see a proportion of gains vanish. There are other means of mitigating this tax, but if you are planning to make a charitable gift anyway, consider gifting assets that are expecting gains, as any capital gain will be extinguished by the gift.
For example, if you wish to make a £5,000 gift to charity and are faced with the choice of making the gift from cash or from shares currently showing a gain, gifting the shares allows you to shed the accrued gains without using your capital gains tax allowance for the year.
A lesser-known fact about charitable giving is that you can make gifts effective for the previous tax year if you have not yet submitted a tax return for that year. Charitable gifts are one of the few actions that can be taken after the end of the tax year which affect your income tax calculation.
Giving to charity should benefit both parties. This is enhanced by gifting in a way that provides the maximum possible support for your charity and is tax efficient for you. If you have a charity you want to donate to, reach out to them, question them, and explore how they can make best use of your gift. And when you do donate, keep in touch and hear about the difference your support has made.
If you would be interested in finding out more about the benefits of charitable gifting and would value speaking to a chartered financial planner, why not get in touch.
Note: The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.