This site uses cookies to improve your browsing experience and analyse use of our website. By clicking ‘I accept’ you agree and consent to our use of cookies. You can find out more about our cookies here. Find out more

Gift Aid: The tax benefits of charitable giving

Gift Aid: The tax benefits of charitable giving

Guy Sterling

Making charitable donations under the Gift Aid regime is often overlooked as a way to reduce UK tax liabilities without taking complex advice. Here, we explore the tax benefits of charitable giving for higher or additional rate taxpayers, and the potential pitfalls in incorrect reporting.

How do cash Gift Aid donations affect tax liabilities?
Cash Gift Aid donations are made with basic rate tax relief included. This means that when a donation is made of say, £80, the charity will receive £100. A higher or additional rate taxpayer can claim additional tax relief on the donation, reducing their tax bill by £20 or £25 on an £80 donation.

Additional tax benefits can apply where income is close to the high-income child benefit charge of £60,000 or restriction to the personal allowance of £100,000.

Non-taxpayers should not sign the Gift Aid declaration, otherwise they will need to pay the tax credit claimed by the charity to HMRC.

What are the opportunities?
Charities generally ask for a Gift Aid declaration to be signed which covers donations made to them in the current tax year and previous three tax years. This enables claims for higher rate tax relief for those earlier years, if not previously made. Copies of these declarations should be kept to support any claims for additional tax relief.

Individuals who are employed and make regular donations can ask HMRC to amend their PAYE coding notice to include the tax relief due on the donations. This ensures that the tax relief is received throughout the tax year, as opposed to waiting until the self-assessment tax return is filed.

Tax relief is given at source if charitable donations are made through an individual’s payroll under PAYE.

When completing the self-assessment tax return for a particular tax year, as well as claiming tax relief for the donations made during that tax year, it is possible to claim for any donations made after the end of that tax year up until the date the tax return is filed. The tax return must be filed on or before the normal self-assessment filing date.

What about gifting assets?
In addition to cash, it is possible to gift assets, such as stocks, shares and property. Depending on the type of asset, advice may be needed in ascertaining its value. Qualifying investments include:
  • shares or securities which are listed on a recognised stock exchange;
  • shares and securities dealt on any designated market in the UK, i.e. the Alternative Investment Market (AIM) and the PLUS Market;
  • units in an authorised unit trust (AUT);
  • shares in a UK open-ended investment company (OEIC);
  • holdings in certain foreign collective investment schemes;
  • a qualifying interest in land.
Where gifts of the above assets are made, full tax relief should be available at the donor’s marginal tax rate.

These types of assets would normally be within the scope of capital gains tax. However, where a gift of a qualifying asset is made, the disposal is exempt from capital gains tax. In some cases, the charity might prefer cash, as a gift of an asset will not enable them to claim tax relief on the donation.

It is worth considering whether it is more tax-efficient to gift the asset to the charity, as opposed to selling it personally and donating the cash.

Is there a limit to how much I can give?
While there can be a restriction on tax relief against general income for some losses, those rules do not apply to gifts of assets to charities.

What about inheritance tax (IHT)?
Outright gifts and bequests to charity are completely free of IHT.

Where more than 10% of an individual’s net estate is left to charity, the rate of tax on the chargeable estate is reduced from 40% to 36%.

Handling HMRC enquiries
To minimise HMRC asking questions about claims for tax relief, the paperwork must reflect the donor’s intentions. For example, where a donation is intended to be made jointly with a spouse or civil partner, the Gift Aid declaration should reflect this.

Donations made through a self-employed business, whether as a sole trader or a partner, are rarely tax deductible against business profits. The donations should be claimed on personal self-assessment tax returns instead. When a partnership donates to a charity, it is necessary for each individual partner to make their own Gift Aid declaration for the charity to be able claim Gift Aid on the donation.

This does not apply to donations by limited companies. In this case, a deduction should be allowed.

Until 5 April 2024, it was possible to claim tax relief on certain EU charitable donations. This is no longer the case, so a review of donations included in PAYE coding notices should be undertaken to make sure that only allowable relief is included in the code number.

How we can help
Our specialist experts on the tax benefits of charitable donations can advise on recovering unclaimed higher rate tax relief for earlier years, a comparison of the tax benefits of gifting cash or an asset and whether it is more tax-efficient to carry back a donation to a previous tax year. Contact us to discuss how we can help you.

 
Charity