Inheritance Tax: Charitable donations

An often-overlooked subject in relation to tax is the relief available on qualifying charitable Gift Aid donations. Gift Aid payments are made net of 20% basic rate tax. If you wish for a charity to receive a total of £1,000, a physical payment of £800 is required. The charity will then claim back the £200 from HMRC. For basic rate taxpayers, no further adjustment is required, however for higher and additional rate taxpayers, an adjustment is required via the tax return. The tax relief is obtained via the extension of the basic rate band, by the gross charitable donation made, meaning more income is subject to tax at the lower rates.

Any charitable donations made in the current tax year prior to the submission of your tax return can also be carried back to the previous year to accelerate any tax relief. This can be particularly beneficial as there is an interaction between Gift Aid payments and the calculation of your Personal Allowance (your personal allowance tapers by £1 for every £2 you earn over £100,000). For example, an individual with a gross income of £101,000 could make a £800 (net) charitable donation and carry this back. This would mean that they have a reinstated Personal Allowance and have reduced their tax liability by £400. The net cost to the taxpayer would be £400 (£800 cost less £400 saving), however, the charity would benefit from the £1,000 donation (£800 paid plus £200 from HMRC).

In addition to Gift Aid donations, individuals can give shares in quoted companies on a recognised stock exchange to a charity. The gross value of the shares, on the date of the gift, is treated as a deductible payment for Income Tax purposes. No further adjustments are required to the tax computation, or the tax rate bands as above. A gift of shares worth £800 would result in an Income Tax saving of £480, meaning a net cost of £320 to the individual. Please note, in this case the charity would not receive the additional £200 as no ‘Gift Aid’ can be claimed from HMRC on an outright gift. This can be especially useful if you have an asset which, if disposed of on an open market, would result in a CGT liability. When making a transfer of assets to a charity, it is not a taxable event for CGT purposes, increasing any further tax savings.

Budget 2023 included an update to the tax relief on EEA/EU charitable donations. Previously, donations to charities located in the EEA/ EU would qualify for Gift Aid, following the principles explained above. However, to obtain tax relief on donations made after 15 March 2023 (subject to a very few charities which have asserted their UK charitable status), it will be restricted to UK charities only. This change is not just relevant for Income Tax purposes but could also affect your Inheritance Tax (IHT) exposure. If you have any specific donations in your will to overseas charities, please contact Duncan Cleary, or our Private Client team, to ensure that the charity (or charities) will qualify for IHT relief under the new definition.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.