Many of us are keen to support charitable causes, either during our lifetimes or by including bequests in our wills.
A number of tax incentives for giving to charity are made available to incentivise taxpayers to donate – Gift Aid being the most commonly used income tax relief. This article considers the various options available and the associated tax savings.
Tax relief on charitable donations during your lifetime
How gift aid works and how to claim tax relief
If you wish to donate cash to a UK registered charity during your lifetime, the Gift Aid scheme is particularly beneficial as it provides tax relief to both the charity and the donor, where the donor is a higher or additional rate taxpayer.
As long as you are a UK taxpayer and sign a Gift Aid declaration, the charity is able to reclaim basic rate tax, which currently equates to 25p for every £1 donated (a donation of £100 provides a tax repayment of 20/80ths x £100 eg £25).
Before signing the declaration, you should satisfy yourself that the tax reclaimed by the charity will not exceed your income tax and capital gains tax (CGT) liability in the year; otherwise you’ll be required to pay the shortfall to HMRC.
Additional tax relief for higher and additional rate taxpayers
If you’re a higher rate or additional rate taxpayer, you can claim further income tax relief in respect of the cash gift, through your tax return or through your PAYE tax code, if you have one.
Carrying back gift aid to a previous tax year
An individual may elect for tax relief on a cash donation made under the Gift Aid scheme in the current tax year to be carried back and treated as arising in the previous tax year. To qualify, the donation must be made on or before the date that the prior year’s tax return is submitted, and that return must be filed on time. Care is therefore required in managing both the timing of the donation and the submission of the tax return for the carry‑back to be effective, and professional advice should be obtained.
Tax relief on donating shares, property and other assets
Tax relief is also available if you give certain qualifying assets to a UK registered charity. These assets include:
- Shares or securities listed on a recognised stock exchange (including London and any recognised overseas stock exchange). AIM listed shares are also eligible.
- Units in authorised unit trusts and shares in open-ended investment companies.
- Freehold or leasehold interests in land in the UK.
You’ll receive income tax relief by deducting the market value of the asset (less the value of anything you receive from the charity in return) from your taxable income, through a claim in your tax return. Relief is given at the donor’s marginal rate of tax. Unlike cash donations under Gift Aid, charities aren’t able to claim tax repayments from HMRC on the gift of assets.
Capital gains tax relief on gifts to charity
Ordinarily, the gift of an asset may give rise to a CGT charge if the asset has increased in value, but a gift made to a UK registered charity is treated as made on a no gain/no loss basis and so doesn’t give rise to a CGT charge.
Inheritance tax relief on charitable donations in your will
Generally, inheritance tax (IHT) is payable at a rate of 40% on an estate worth over £325,000. Gifts left to charity on death benefit from an exemption from IHT. This exemption extends to gifts of any asset, including cash.
Reduced inheritance tax rate (36%) for charitable giving
In addition, if 10% or more of your total estate is left to charity, a reduced IHT rate of 36% will apply. The lower rate of tax has proved attractive to many people and has encouraged them to increase the amount given to charity. When the numbers are worked through, the lower tax burden can often mean that more is received by the eventual non-charity beneficiaries of the estate.
Setting up a charity or charitable trust in the UK
Donating to an existing charity may not suit everyone’s philanthropic objectives. Wealthier individuals who require a greater degree of control and flexibility over how their funds are used, and the causes that benefit might decide to set up and fund their own charity instead.
Charitable trusts are often used, and once they are set up and registered, the reliefs mentioned earlier in this article will apply to any gifts made to the trust.
Charitable trusts are established by a deed, which a solicitor will need to draw up. The deed will usually set out the objectives of the charity and the causes it will support, along with the names of the initial trustees. The trustees have overall responsibility for ensuring the charity meets its charitable objectives and its legal and reporting obligations.
Once the trust has been established, it should be registered with the appropriate charity registry (the Charity Commission for English and Welsh charities, OSCR for Scottish charities and the Charity Commission for Northern Ireland) and with HMRC. This will ensure that the trust benefits from the tax exemptions available to charities. A solicitor or accountant can assist with these applications.
Depending on the size of the trust, it will need to file accounts and a return to the Charity Commission on an annual basis.
Setting up and running a charity does involve a certain degree of administration. However, with the right advice, this can be very rewarding and offer the chance to leave a lasting legacy that continues beyond your own lifetime.
Charitable companies
Charities can also be set up as corporate entities, such as a company limited by guarantee or a Charitable Incorporated Organisation.
Donor advised funds
As an alternative to setting up a charity, charitable giving can be made via a donor advised fund (DAF). A DAF is a philanthropic fund that allows donors to make charitable contributions to the fund, receive immediate tax benefits and recommend grants from the fund over time. The fund is established under a DAF provider (an umbrella charity) that administers the fund on behalf of the donor. This greatly reduces the administrative effort required from the donor.
Tax relief for internationally mobile individuals
From 6 April 2025, the UK has replaced the remittance basis of taxation with a new system for taxing foreign income and gains. In most cases a UK tax resident individual who was previously non‑UK domiciled is now taxed on their worldwide income and gains as they arise and can generally access the same charitable tax reliefs as other UK taxpayers, including Gift Aid and relief for gifts of qualifying assets.
However, care is needed where:
- Donations are funded from offshore accounts containing income or gains arising before April 2025, or
- The individual is newly resident in the UK and within the scope of the new foreign income and gains (FIG) regime.
In these cases, the interaction between the tax rules and charitable giving can be complex, and specific advice should be taken before making significant donations.
How to maximise tax relief on charitable giving
Those who give to charity are nearly always driven by a desire to help causes that are close to their own hearts, but there are many practical ways to make their gift/s. While some donors prefer to make one-off donations during their lifetime, others prefer to leave legacies in their wills or set up their own charities.
By understanding and maximising the tax reliefs available, there is potential for individuals to increase the amount their chosen charity receives, as well as reducing their own tax bills.
For advice regarding any of the options raised here, please speak to your usual Saffery contact or get in touch with David Humphrys.
Additional Resources:
Tax relief on charitable donations – Gov.UK
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