Wondering whether or not to gift money to charity? If you are considering it there are many tax benefits for doing so. Let me explain some of them to you.
Gift Aid
If you donate through Gift Aid the charity receives an extra 25% on top of the amount donated by you. So if you donate £100 the charity receives an extra £25 from the government. If you are a higher rate taxpayer you personally claim back £25 which means your charitable gift of £100 has only cost you £75 yet the charity receives £125! Follow the link for a more thorough explanation of how this works.
Your gift counts as an exempt gift for Inheritance Tax (IHT) purposes which means that £75 immediately falls outside of your estate for Inheritance Tax purposes. So a further 40% of £75 or £30 is no longer subject to IHT.
Therefore your initial gift of £100 results in an Income Tax saving of £50 between you and the charity and a potential IHT saving to you of £30. The charity gains £125 whereas your estate only suffers a loss of £45 (£75-£30). This assumes you are a higher rate Income Tax payer with an estate subject to IHT.
If you are fortunate enough to find a charity that is involved in match funding initiatives your effective “tax savings” or discount become even greater. Let’s show you how with a further example.
You donate £100 by Gift Aid. The charity matches your gift from its reserves, for example into an endowment in your name for your own charitable purposes. Your gift is increased to £200. The charity still receives a 25% or £25 top up from the government which increases your gift (including the matched funding) to £225. Your IHT saving is the same as in the previous example i.e. £30 if you are a higher rate taxpayer or £40 (£100 x 40%) if you are a basic rate taxpayer. The net cost to you as a basic rate taxpayer is £100 and as a higher rate taxpayer it is £75 because you can claim back the difference between the higher rate of 40% and the basic rate of 20% on the gross charitable donation of £125.
To summarise the combined discount made up of the IHT and Income Tax savings and the matched funding could potentially save you 73.3% as a basic rate taxpayer, 80% as a higher rate taxpayer(40% tax rate) and as much as 85.3% as an additional rate taxpayer (45% tax rate).
Gifting to charity via your Will
If you gift more than 10% of your net estate to charity on death you not only save 100% Inheritance Tax on the gift you also benefit from paying Inheritance Tax at a reduced rate of 36% on the rest of your estate instead of 40% which represents a further 10% discount (i.e. a saving of 10% of 40%). The rules are complicated so make sure you check the rules carefully before drafting your Will or take advice from a tax/will writing specialist. A further tip is to ensure that you use the correct charity name in your Will otherwise the gift will be invalid for IHT purposes. That could be a very expensive mistake for your estate.
Charitable endowment
If your charity offers funding via an endowment then I would urge you to take it up. I created an endowment with the Milton Keynes Community Foundation some years ago. I called it The Tony Byrne Financial Education Fund. The money can only be used to financially educate local people regardless of class level and whether working or on benefits. Everybody needs financial education.
The beauty of this arrangement is that the donor creates what is in effect their own charity but without all of the costs and administration involved in running their own charity. It also means the donor has left a legacy which will last into perpetuity.
Tax reliefs are just the same as for any other charitable donation.
Forming your own charity
The advantage of forming your own charity is greater control but you will have more costs and more administration to handle. Do you really need the hassle? So unless you are planning to create a large charity it probably isn’t worth it. For most people it would be simpler, cheaper and less time consuming to gift to charities or create your own endowment fund.
Again tax reliefs are just the same as for any other charitable donation.
Corporate charitable giving
Companies may make charitable donations but the tax relief is calculated differently. The contribution is treated as a tax deductible business expense which means that Corporation Tax relief at up to 25% is available on corporate charitable donations. However, the tax saving comes in the form of a reduced Corporation Tax liability. The Corporation Tax is payable nine months after the end of the company’s accounting period which means that tax relief is deferred by 9-21 months depending on when the charitable donation was made.
So charitable gifting is not only philanthropic but also highly tax efficient. You know it makes sense.*
*RISK WARNING
The Financial Conduct Authority do not regulate tax planning, estate planning or will writing. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.
Wondering whether or not to gift money to charity? If you are considering it there are many tax benefits for doing so. Let me explain some of them to you.
Gift Aid
If you donate through Gift Aid the charity receives an extra 25% on top of the amount donated by you. So if you donate £100 the charity receives an extra £25 from the government. If you are a higher rate taxpayer you personally claim back £25 which means your charitable gift of £100 has only cost you £75 yet the charity receives £125! Follow the link for a more thorough explanation of how this works.
https://www.gov.uk/donating-to-charity/gift-aid
Your gift counts as an exempt gift for Inheritance Tax (IHT) purposes which means that £75 immediately falls outside of your estate for Inheritance Tax purposes. So a further 40% of £75 or £30 is no longer subject to IHT.
Therefore your initial gift of £100 results in an Income Tax saving of £50 between you and the charity and a potential IHT saving to you of £30. The charity gains £125 whereas your estate only suffers a loss of £45 (£75-£30). This assumes you are a higher rate Income Tax payer with an estate subject to IHT.
If you are fortunate enough to find a charity that is involved in match funding initiatives your effective “tax savings” or discount become even greater. Let’s show you how with a further example.
You donate £100 by Gift Aid. The charity matches your gift from its reserves, for example into an endowment in your name for your own charitable purposes. Your gift is increased to £200. The charity still receives a 25% or £25 top up from the government which increases your gift (including the matched funding) to £225. Your IHT saving is the same as in the previous example i.e. £30 if you are a higher rate taxpayer or £40 (£100 x 40%) if you are a basic rate taxpayer. The net cost to you as a basic rate taxpayer is £100 and as a higher rate taxpayer it is £75 because you can claim back the difference between the higher rate of 40% and the basic rate of 20% on the gross charitable donation of £125.
To summarise the combined discount made up of the IHT and Income Tax savings and the matched funding could potentially save you 73.3% as a basic rate taxpayer, 80% as a higher rate taxpayer(40% tax rate) and as much as 85.3% as an additional rate taxpayer (45% tax rate).
Gifting to charity via your Will
If you gift more than 10% of your net estate to charity on death you not only save 100% Inheritance Tax on the gift you also benefit from paying Inheritance Tax at a reduced rate of 36% on the rest of your estate instead of 40% which represents a further 10% discount (i.e. a saving of 10% of 40%). The rules are complicated so make sure you check the rules carefully before drafting your Will or take advice from a tax/will writing specialist. A further tip is to ensure that you use the correct charity name in your Will otherwise the gift will be invalid for IHT purposes. That could be a very expensive mistake for your estate.
Charitable endowment
If your charity offers funding via an endowment then I would urge you to take it up. I created an endowment with the Milton Keynes Community Foundation some years ago. I called it The Tony Byrne Financial Education Fund. The money can only be used to financially educate local people regardless of class level and whether working or on benefits. Everybody needs financial education.
The beauty of this arrangement is that the donor creates what is in effect their own charity but without all of the costs and administration involved in running their own charity. It also means the donor has left a legacy which will last into perpetuity.
Tax reliefs are just the same as for any other charitable donation.
Forming your own charity
The advantage of forming your own charity is greater control but you will have more costs and more administration to handle. Do you really need the hassle? So unless you are planning to create a large charity it probably isn’t worth it. For most people it would be simpler, cheaper and less time consuming to gift to charities or create your own endowment fund.
Again tax reliefs are just the same as for any other charitable donation.
Corporate charitable giving
Companies may make charitable donations but the tax relief is calculated differently. The contribution is treated as a tax deductible business expense which means that Corporation Tax relief at up to 25% is available on corporate charitable donations. However, the tax saving comes in the form of a reduced Corporation Tax liability. The Corporation Tax is payable nine months after the end of the company’s accounting period which means that tax relief is deferred by 9-21 months depending on when the charitable donation was made.
So charitable gifting is not only philanthropic but also highly tax efficient. You know it makes sense.*
*RISK WARNING
The Financial Conduct Authority do not regulate tax planning, estate planning or will writing. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.
Tony Byrne
Chartered and Certified Financial Planner
Managing Director of Wealth and Tax Management
If you are looking for expert guidance in Financial Planning contact Wealth and Tax Management on 01908 523740 or email wealth@wealthandtax.co.uk