“Oh! But he was a tight-fisted hand at the grindstone, Scrooge! a squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster.”
The UK has a long history of charitable and philanthropic giving by private individuals. Charles Dicken’s a Christmas Carol, written in 1843, tells of a man learning to embrace a spirit of charity and philanthropy and it remains to this day an extremely popular and highly reproduced book.
Successive UK Governments have further encouraged public charitable giving in a variety of tax incentives allowing individuals to make donations to charities and to causes of their choosing. Many individuals would be happy to embrace philanthropy even without any tax incentives, but it is always helpful to understand what options are available when choosing to make donations.
The current Government has announced the Autumn Budget will take place on 30 October 2024. The Government has hinted at spending cuts and possible tax rises in some areas. It remains to be seen whether any of these changes will impact on charities and any of the reliefs currently available, which are summarized below.
Gift Aid
One of the most important tax incentives given to both UK charities and UK donors is “Gift Aid”. This is a very valuable relief which has two main incentives where the donor is a UK taxpayer, and the charity is registered for Gift Aid.
First, where the donor has made a qualifying donation, the charity can then claim from HMRC a further £0.25 for every £1 donated. The UK Government will pay the charity directly, as long as the conditions are met. There are several relevant conditions, but two main conditions are that the donation must be a purely voluntary donation, so that a purchase of tickets or a “suggested donation” for attending an event cannot qualify for Gift Aid. Further, the donor must have paid at least the same amount in UK income tax or capital gains tax in the year of the donation as the charity will reclaim from HMRC.
Second, where the donor is a “higher rate” or “additional rate” taxpayer (i.e. their total taxable income exceeds the threshold designated as “higher rate”), that individual can make a claim in their own personal tax return to reclaim the “higher” or “additional” rate of tax paid by them on the donation.
By way of example, if a Mr Scrooge, a higher rate taxpayer, gave £100 to a charity registered for Gift Aid, the charity would be able to claim a further £25 from HMRC so the total benefit received by the charity is £125. Mr Scrooge can then reclaim the higher tax paid by him on the donation, so that he can claim a repayment of £25 from HMRC. Mr Scrooge can then choose either to keep the £25, or to donate that sum to the charity.
Relief from Income Tax
In addition to Gift Aid, the UK government has a further income tax incentive for charitable donations. The value of donations made to UK registered charities can be deducted from an individual’s taxable income. The individual should list all donations made to UK charities in the tax year in their personal tax return, which will reduce their income tax liability for that year.
Relief from Capital Gains Tax
When an individual makes a gift or sells certain assets, if the asset has increased in value of the time the individual has held the asset, then Capital Gains Tax (CGT) is due. There is an exception where an individual gives assets directly to a UK registered charity. A gift of an asset to a UK registered charity is exempt from CGT. UK donors may therefore wish to consider making gifts of assets, rather than of cash, to charity, particularly if the rates of CGT are increased.
Relief from Inheritance Tax
Gifts to UK registered charities are also exempt from Inheritance Tax (IHT), whether the donation is made during a person’s lifetime or under their will. Gifts to a charity made under a person’s will may also qualify for a further tax advantage, not just for the charities chosen, but for the individual’s family and other beneficiaries.
Gifts which meet the relevant threshold (broadly, gifts of at least 10% of a person’s estate on death) will benefit from two separate IHT advantages. First, the gift itself is free from IHT, so the charity will receive the full sum without deduction. Second, the remainder of the donor’s estate will benefit from a reduced rate of IHT. The standard rate of IHT is 40%, but where a qualifying gift is made, the tax rate is reduced to 36%.
International Philanthropy
As the world has become an increasingly small place, and as international philanthropy has become more widespread, many donors will need to understand how to make an international donation safely and in a tax efficient manner.
Gift Aid and the other tax incentives noted above are not available to donations made to charities which are not qualifying charities; only UK registered charities will qualify. This will exclude a large number of international organizations which do not have a registered charity arm in the UK.
UK registered charities can, however, carry out their charitable objects overseas so that funds raised in the UK can still benefit from the tax reliefs noted above, but still be used to fund international causes.
UK taxpayers who wish to give internationally may, therefore, prefer to make a donation to a UK registered charity which carries on its charitable work overseas. Alternatively, many large international charities have registered charity status in multiple jurisdictions so that they can carry out their work and receive donations directly.
Some individuals may prefer to establish their own charity to carry on their chosen philanthropic aims if they cannot find a charity which already carries out these aims, or if the donor would prefer to retain more control over the use of funds or the charity’s objectives. Acting as a charity trustee comes with significant responsibilities, so donors may want to consider using a “donor advised fund” (DAF).
DAFs are UK registered charities which allow the donor to create a separate “fund” at that charity. The DAF will then make donations to other UK or international organizations where the objects of the entity are “charitable” under English law, even if the organization itself is not a registered charity in the UK. This allows donors to make donations in a tax efficient manner while retaining the ability to give both within and outside the UK.
If you have any questions on any of the topics mentioned above, please contact Catherine Pugsley or Anna Gaston of Lee Bolton Monier-Williams LLP.