What are the taxation rules to charitable giving?

What are the taxation rules for charitable giving?- Butt Miller Chartered Accountants

We consider the options available for individuals considering making tax-effective gifts to charity.

Individuals can get tax relief on gifts to UK charities:

  • under Gift Aid
  • through a Payroll Giving scheme
  • by making a gift of certain shares or land

Does location of the charity matter?

UK charitable tax reliefs are available to certain organisations which are the equivalent of UK charities and Community Amateur Sports Clubs (CASCs) in the EU, Norway and Iceland. UK donors are able to receive the same tax reliefs in respect of these donations and legacies that they enjoy for donations to UK charities.

The qualifying overseas charities benefit from the same UK tax exemptions and reliefs as UK charities.

What is Gift Aid?

Gift Aid is the main vehicle for tax efficient giving to charities. It can apply to any donation whether large or small, regular or one-off. Making a payment under Gift Aid allows donors to ensure that their chosen charities can reclaim the basic rate of income tax on all their donations, equal to 25% of the amount donated.

As an added boost for donors, higher rate taxpayers can claim for themselves the difference between basic and higher (currently 20%) or additional (currently 25%) rates of tax against their own income tax liabilities, reducing further the net cost of the donation.

This relief may be used to reduce the tax payable for the previous tax year if the donation has been made before the tax return for the previous year has been submitted to HMRC.

Example:

Gift to charity£1,000
Charity reclaims tax £250
Total value of gift £1,250

Tax reduction for higher rate taxpayer £250 and for additional rate taxpayer is £312.50.

So a gift worth £1,250 to the charity could cost as little as £687.50.

How does a gift qualify for Gift Aid?

There are three main conditions.

The taxpayer must:

  • make a declaration to the charity that the gift is to be treated as a Gift Aid donation
  • pay at least as much tax as the charities will reclaim on the gifts in the tax year in which the gifts are made
  • not receive excessive benefits in return for the gift

Making a declaration

The declaration is the charity’s authority to reclaim tax from HMRC on the gift. The declaration can be in writing or orally but, usually, the charity will provide a written declaration form. Individuals do not have to make a declaration with every gift.

In order to make a Gift Aid donation, the individual needs to make a Gift Aid declaration. The charity will normally ask the individual to complete a simple form – one form can cover every gift made to the same charity or CASC for whatever period, and can cover gifts the individual has already made (backdating the claim for up to four years) and/or gifts made in the future.

However, if you are on a low income it may not be wise to sign the declaration. The charity will be claiming tax you have paid from HMRC, and if you do not pay tax HMRC will be expecting you to pay the amount the charity claims.

In this situation perhaps ask someone you know pays tax to make the donation on your behalf to maximise the charity’s benefit and avoid creating a tax bill for yourself.

Gift Aid donor benefit rules

From 6 April 2019 the donor benefit rules that apply to charities that claim Gift Aid are simplified.

The previous mix of monetary and percentage thresholds (detailed below) have been replaced by two percentage thresholds:

  • the benefit threshold for the first £100 of the donation remains at 25% of the amount of the donation
  • for larger donations, charities can offer an additional benefit to donors up to 5% of the amount of the donation that exceeds £100

There is an overriding limit on the value of benefits received by a donor in a tax year as a consequence of donations to a charity, which is £2,500.

Taxpayers can pay membership subscriptions to a charity through Gift Aid, provided any membership benefits received do not exceed certain limits.

However, disregard free or reduced entry to view any property preserved, maintained, kept or created by a charity in relation to their charitable work.

Prior to 6 April 2019 the limits on the value of benefits received relative to donations were:

  • 25% of the value of the donation, where the donation was less than £100
  • £25 where the value of the donation was between £100 and £1,000
  • 5% of the value of the donation, where the donation exceeded £1,000

Charities Online

Charities Online allows Gift Aid repayments to be claimed online. The system is designed to speed up and simplify the process of making a repayment claim, saving valuable time for charities and CASCs.

There are three options for making claims:

  • Option one is for charities that file Gift Aid claims for fewer than 1,000 donations.
  • Option two is for larger charities that make claims for over 1,000 donors
  • Option three applies to those few charities that do not have the internet and involves completing a ChR1 paper form. HMRC aims to repay amounts claimed via Charities Online within 20 working days. There are built?in checks to detect errors in the process before the form is sent. There are many complex accounting and reporting requirements governing charities and not?for?profit organisations.

Whatever the nature of your organisation, we can help you to meet its objectives. Please contact us for more information.

CAF Charity Account

This is a very flexible scheme organised by CAF (Charities Aid Foundation). An account can be opened with as little as £10 a month by direct debit, or with a single payment of £100.

The ‘account’ is in effect a ‘charity cheque book and debit card’ and can be used to make donations easily – spontaneously or regularly – by phone, by post or online – to chosen charities. Tax is recovered at the basic rate and added to the account.

As with Gift Aid, higher and additional rate taxpayers can reclaim the difference between the basic and higher or additional rates of tax.

Payroll Giving

This scheme allows an individual to make gross donations to charity (deducted from salary before tax is calculated). There is no statutory minimum or maximum limit, although individual schemes may impose a lower monthly donation limit.

Example:

Gift from gross pay £50
Charity receives  £50
Actual cost to basic rate taxpayer  £40
Actual cost to higher rate taxpayer £30
Actual cost to additional rate taxpayer £27.50

Gifts in kind

Gifts of certain shares and securities, land and buildings to a charity attract income tax relief as well as capital gains tax (CGT) relief.

Example, Gift of shares valued at £1,000:

Income tax saving
Basic rate taxpayer  £200
Higher rate taxpayer £400
Additional rate taxpayer £450
Potential CGT saving
Basic rate taxpayer  £100
Higher rate taxpayer £200
Additional rate taxpayer £200

There is a similar corporation tax relief for gifts by companies.

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