by Bart Peerless and Josh Winfield, Charles Russell Solicitors
Originally published in Private Wealth Advisor, February 2002
INTRODUCTION
The warm glow from doing a good deed is not the only benefit of giving to charity. Charitable gifts in the UK also carry potential tax advantages for the donor, which grow exponentially for those paying income tax at the higher rate. For the wealthier individual, creating one’s own charity can also present the opportunity to make a significant difference to favourite causes through an entity that becomes a lasting source of family pride.
WHAT DO WE MEAN BY CHARITY?
A charity will qualify as such under English and Welsh law if its purposes are limited to one or more of the advancement of religion (not restricted to Christianity), the advancement of education, the relief of poverty, and any other purpose beneficial to the community (for example, the environment). A charity must also be for the benefit of the public. Gifts for political purposes are not charitable, although they carry their own tax exemptions.
CHARITABLE GIVING – THE TAX BENEFITS
The tax benefits of donations to charity are numerous, covering all the main taxes individuals pay on their UK assets. The benefits are also available to those who are not resident or are resident but not domiciled in the UK but have a liability to UK income or capital gains tax. Although increasing with the value of the gifts, these benefits accrue even to donors of small sums. The main tax advantages to individuals of charitable giving are summarised below.
Income Tax
Under current "Gift Aid" rules, higher rate (currently 40%) taxpayers making charitable gifts obtain substantial income tax relief. When a higher rate taxpayer makes a Gift Aid donation, the charity reclaims the value of the income tax chargeable at the basic rate (currently 22%) from the Inland Revenue. The client obtains higher rate tax relief by having his basic rate tax band extended by the "grossed up" value of the gift. Thus, a gift of £7,800 by a higher rate taxpayer to charity using a Gift Aid declaration is treated as if it were net of income tax at the basic rate. The charity claims an additional £2,200 (i.e. the basic rate income tax on the "gross" figure of £10,000) from the government. The client’s basic rate income tax band (currently £1,881 to £29,400) is then extended by this gross figure. If he has income of at least £39,400, he saves £1,800 by paying tax at 22% on £10,000 of income that should have been taxed at 40%. The charity gains £10,000 from a gift costing the donor £6,000.
An important and relatively new relief is that when the client gives listed shares or securities (or units or shares in an authorised unit trust or open-ended investment company) to charity, he may deduct their market value from his income for the year. If he pays tax at the higher rate on income worth at least as much as the gift, this will mean income tax relief of 40% of the gift’s total market value. This is in addition to any capital gains tax ("CGT") saving; the joint effect of the two reliefs can be exceptionally attractive.
Capital Gains Tax
Gifts to charity are not liable to CGT (the top rate of which is 40% for individuals). These gifts are technically treated as disposals for neither gain nor loss, so clients who wish to make lifetime charitable gifts from capital rather than income should use assets showing chargeable gains, not cash or assets standing at a loss. Charities are themselves CGT exempt.
Inheritance Tax ("IHT")
Charitable donations are generally exempt from IHT.
CHARITABLE GIVING: THE OPTIONS
The vast majority of charitable donations are made directly to established registered charities that are raising funds from the public for particular charitable purposes.
One disadvantage of this approach to someone contemplating more significant donations is that he loses control of the timing and precise application of his donation. Thus, a donor who has just received a large bonus or exercised valuable options may be in a hurry to make a donation in the relevant tax year (to make sure that he takes maximum advantage of the tax reliefs available) but may barely have considered which areas of charitable concern he wishes to benefit, or how.
One solution is to open an account with the Charities Aid Foundation ("CAF"). The client can pay irregular sums of £100 or more, make monthly payments by direct debit or as deductions from his pay, or give shares to CAF, who will sell them and deposit the proceeds into his account. These deposits will count as charitable donations, attracting all the associated reliefs at the time they are made. The client may hold the money in his account for as long as he wishes, and pay it out to any charitable organisation in the UK at any time. This system allows a great deal of flexibility, but CAF does charge for this service.
Another is to establish a bespoke charity. Annual compliance costs mean that this is probably uneconomical for sums below £150,000. For the wealthy, however, this route has many attractions apart from the retention of an element of control over the funds. Using family trustees, the creator can instil a tradition of charitable giving in the family. Trusteeship of the family charity can also be an effective way of introducing younger members of a family to the management of wealth.
Privately established charities are usually created as trusts (where a settlor settles property on trustees, usually including him), although charities can also be corporate entities (advisable where trustees are concerned to limit their personal liability).
Most charities established in England and Wales must be registered with the Charity Commission. The registration form – and process – is straightforward. Very small trusts, with a total income of less than £1,000 a year and who do not occupy any property, need not be registered. The Charity Commission looks for a clear set of objectives for the charity and a properly constituted and independent board of trustees.
CONCLUSION
With the wealthy becoming wealthier, alongside increasingly generous tax exemptions, there are now many more clients in the UK wishing to make significant charitable donations in a structured way. All advisors to the wealthy should understand how charities work and the tax breaks associated with them.
Bart Peerless is a partner and Josh Winfield a barrister with Charles Russell (Solicitors) in London.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
