We often think of philanthropy in the context of the ultra-high net worth individual with a high profile charitable foundation, but in reality the spectrum is much broader – and so are the tax breaks. In this article we take a look at the various tax efficient gifting options available in the UK.
One-off and regular donations
Most individuals will have made one-off or regular donations to a UK charity and be familiar with the concept of Gift Aid. The Gift Aid scheme allows an individual to donate to UK (or certain EEA) charities a sum which is net of basic rate income tax relief, with the charity then able to reclaim the basic rate tax direct from the government. A £1 donation is therefore worth £1.25 to the charity.
Donations will qualify for Gift Aid provided the donor has paid enough UK tax for the year. This will be the case provided the donations are not more than four times the taxpayer’s UK tax liability for the year. The tax can be either income or capital gains tax (CGT).
Higher and additional rate tax payers can claim from HM Revenue & Customs (HMRC) the difference between the basic rate tax claimed by the charity and the higher or additional rate tax paid. For example, from a £1,000 donation, the charity would receive £1,250 and the higher rate taxpayer could claim further tax relief of £250 to reflect the additional 20% paid. It is also possible to carry back current year donations to the previous tax year to accelerate the relief.
Gifts to charity are exempt from inheritance tax (IHT), therefore regular charitable donations can be an effective way of reducing the value of an individual’s estate for IHT purposes without the adverse IHT implications often associated with making gifts.
Some employers offer payroll giving schemes, whereby charitable donations are deducted from an employee’s gross salary before tax. This can be an effective way to donate regularly and removes the need for higher and additional rate taxpayers to claim tax relief. It also removes the administrative burden for the charity of claiming Gift Aid.
Gifts of quoted shares and land
If a taxpayer gifts quoted shares to a UK charity, they will usually be able to deduct the market value of the shares, plus any costs of transfer, from their taxable income for the year. The gift will also be exempt from CGT, making this a particularly valuable relief. This relief can also apply to a gift of land, buildings or qualifying artwork.
The death estate is usually subject to IHT at 40%. Charitable legacies, however, are exempt from IHT and can be bequeathed tax free.
Where an individual leaves 10% of their net estate to a registered UK charity, the IHT rate on the rest of the estate reduces to 36%. It is possible for individuals to draft their will to ensure that the conditions for this relief are met. This may be of interest to those individuals who already plan to leave a significant charitable legacy in their will.
Donor Advised Funds
Donor Advised Funds (DAF) are becoming increasingly popular as philanthropic giving vehicles, often encompassing many tax efficient giving options under one umbrella.
DAFs are funds administered by a registered charity, allowing individuals to make a donation, receive immediate tax relief, and advise on how they would like their charitable donation applied.
The account running responsibilities, including due diligence to confirm the charitable purpose and Gift Aid status of the intended beneficiaries, lies with the DAF. Therefore, DAFs can significantly reduce the administrative burden of philanthropic giving for an active or frequent donor.
Donors can use a variety of assets such as cash, shares, land and artwork to fund their DAF, and can make overseas gifts whilst still benefiting from UK tax relief. DAFs can also offer services for individuals who are dual taxpayers to secure tax relief on donations in more than one jurisdiction, for example the UK and US. This flexibility and personalisation contributes to the increasing popularity of DAFs as giving vehicles.
DAFs can be an effective alternative to setting up a charitable foundation, as the donor can simply open a DAF account which can be named after themselves, their family name or the account can remain anonymous.
Setting up a charitable foundation
Individuals seeking to pursue philanthropic activities on a larger scale may wish to consider setting up their own charitable foundation. This option gives an individual the opportunity to create a bespoke giving vehicle, which can be appealing.
A potential drawback of setting up and running a charitable foundation is that it can be time-intensive. Therefore, this option is often better suited to individuals wishing to commit more time to philanthropic causes, or those who already have a private or family office available to undertake the day-to-day running of the charity. Alternatively, firms such as ourselves have teams dedicated to providing these services on the individual’s behalf, thus removing some or all of the administrative burden.