Making any kind of charitable gift during the tax year, from sponsoring somebody doing a marathon to a larger sum of money gifted to a cause that is close to your heart, can reduce your tax obligations. In an effort to encourage charitable giving among those who have accumulated wealth, the UK government offers a number of tax breaks.
For example, if you made a large donation to a charity just before you died, there would be no inheritance tax on that money, which is normally charged at 40%. Furthermore, if you donated at least 10% of your net estate, that sum would be exempt from inheritance tax and the rate of IHT on the rest of the estate would be reduced from 40% to 36% meaning you could give charitably and find that most of what you’ve donated would have been taken in taxes anyway.
Every charity is eligible for Gift Aid, they just have to be registered with HMRC to claim it. Donating through gift aid means that a charity can claim an extra 25p for every £1 that you give them.
Your donations will qualify as long as they are not more than four times what you have paid in tax in that tax year. If you are in a higher rate tax bracket you can claim back the difference between the tax you’ve paid on the donation and what the charity got back. So, for example, if you pay £500 to a charity, they can claim Gift Aid to make the donation £625. If your tax band is 40% you can personally claim back £125 (£625 x 20%).
Capital gains tax exemption and charitable giving
It’s also possible to save capital gains tax by donating non-cash assets such as shares, land, or residential property. If you sold the asset before donating to charity you would usually pay capital gains tax on any profit before donating the proceeds, but by gifting the asset, you can avoid this – capital gains tax in the UK is 28% of the gains for higher rate taxpayers, so it would eat up a sizeable chunk of the asset.
In some instances, a charity might ask you to sell an asset, such as land or property before you donate. It is possible to do this and still get capital gains tax relief, but you would need records of the gift as well as the charity’s request.
The charitable giving tax exemptions mean that you can diversify your investments without incurring immediate and substantial capital gains taxes.
Donating from your pension or salary
It is also possible to donate to charity either through your employer or pension provider. If your employer or pension provider offers a Payroll Giving scheme, any donation you give through the scheme will come out of your gross (pre-tax) income.
The relief operates on a sliding scale, depending on your tax bracket. For every £1 you donate in this way, you pay:
- 80p as a basic tax rate payer
- 60p as a higher tax rate payer
- 55p if you are an additional tax rate payer
Choosing a charity
Wealth advisers would generally always speak to their clients about charitable giving. Many clients are already charitably minded and set up foundations or are involved in charities during their lifetime while others, once they have understood the benefits of charitable giving and related tax exemptions, can be encouraged to donate when otherwise they might not.
There are more than 157,000 registered charities in the UK and if you don’t have a particular one in mind, choosing who to donate to can feel difficult. Charities go out of their way to tug at the heartstrings, but it’s best to take a close look at the fundamentals. Are they actually making a difference, what are the running costs, etc? You should also consider speaking to them before you commit. And of course, it should be a cause that is close to your heart.
Dame Stephane Shirley who set up The Shirley Foundation and has given away £67 million to date, says: “I found the most meaningful way of giving back was to things that I knew about and cared about and there are only two, and that is information technology, which was my professional discipline and autism, which was my late son’s disorder. As soon as you focus on things that are personal to you, it becomes an activity that you want to do. I enjoy giving money away even more than I did making it in the first place.”
When you have decided on a charity to support, your wealth manager will talk through the ways in which you can gift money. You could set up a dedicated charitable foundation if you have the necessary amount of time, commitment, and organisational skills to do so. Or you could transfer an immediate sum or choose to pay regularly by direct debit.
Donor Advised Funds and tax exemptions
Another way to contribute is via Donor Advised Funds (DAFs) which operate like a charitable bank account and are usually run by an umbrella charity. When you pay into the DAF, you receive tax relief immediately – you can also donate restricted shares or publicly traded securities which can save you capital gains tax. Other assets such as property, art, privately held shares, etc can also be gifted.
The balance is invested and you can make grants of any size to the charities of your choice. A DAF will also give you the flexibility to change and review the charities and the amount of money you donate.
The DAF will do much of the heavy lifting involved in charitable wealth management, handling all administration, your anonymity will be protected, and nominated family members can handle the DAF after your death.
To work out the tax relief you’d receive from a National Philanthropic Trust, UK DAF you can use the following calculator
The rise of giving while living
According to Barclays, giving while living has become increasingly popular as more donors want to see the results of their philanthropy. This trend has been largely driven by successful and often younger entrepreneurs, who are bringing their commercial mindsets to charitable giving and want to make a noticeable difference in their lifetime.
The role of your wealth adviser
Charitable giving is an opportunity for you to connect with your wealth adviser on a more personal level, allowing them an insight into your motivations and ultimate objectives so that they can help you to reach your philanthropic goals whilst also maximising growth.