Charity Taxes


The Budget has generated some interesting headlines with the whole issue of charitable donations being thrust into the public eye. However, for those working in the charity sector and those individuals who wish to make generous gifts the important factors are simply what has changed and what remains the same.

Individuals can still make charitable gifts out of their income and where they have suffered income tax they can complete a gift aid form allowing the charity to reclaim the tax on the gift. There is a trap here for the unwary because if you are a non-taxpayer and you complete a gift aid form HM Revenue & Customs (HMRC) will come and ask for the tax relief the charity has reclaimed.  Therefore, when non-taxpayers make donations they need to be extra careful they don't generate a further tax charge on themselves by inadvertently signing a gift aid declaration.

For the higher rate taxpayer there is some extra tax relief that they can claim on the donation through their tax return each year. The relief provides a further 20 percent of the gift as a reduction in their tax liability and so is certainly worth claiming. However, this is where the recent controversy started because some taxpayers have used this extra tax credit to reduce their taxable income to nil with large donations to charity. Therefore, the government is proposing to restrict this relief so that no taxpayer can reduce their income by more than the greater of 25% or £50,000. It’s unlikely that this will affect many people but it will act as a deterrent to some.

One area of tax relief on gifts to charity which did deserve greater coverage but which has got somewhat lost in the furore created around the above gift aid coverage was the reduced rate of 36% for Inheritance Tax when someone leaves 10% of their net estate to charity.

However, the calculation of the net estate can be quite complicated. In most straight forward cases where the deceased owned their assets in their own name the test is satisfied if the gift is greater than 10% of the assets held less all available reliefs including the individual’s nil rate band, the £325,000 of assets an individual can hold before tax is suffered.

So if you take an individual’s estate at, say, £700,000, where the only relief that is available is the nil rate band, then the net estate is £375,000 and the gift to charity would need to be greater than £37,500 for the 36% rate will be applied.  However, where such a gift was made the net cost to the beneficiaries of the gift is only £9,000, with HMRC suffering the balance of the cost in reduced Inheritance Tax.  However, most estates include joint and other forms of assets and in these cases professional advice will be needed to ensure the test is satisfied and the beneficiaries do receive the benefit of the reduced rate.

It is therefore quite possible that with the restriction on gift aid currently proposed by the government people may look at alternative ways to benefit the charities they wish to support and the new Inheritance Tax relief may offer an interesting possibility.

Graham Poles 
Tax Partner