Gifts to Charity
This section of the website arises out of a conversation with Alex Jones of Shelterbox, one of the charities that we like: see Supporting local communities. This article answers the simple question, how can tax relief help gifts to charity? The examples are for illustration only and do not constitute legal advice. For that, the taxpayer should always take specific advice on his or her circumstances.
How can tax relief help gifts to charity?
Simple cash gifts: Income Tax
One of the simplest gifts is the cash donation. In its purest form, the donor gets nothing in return. Gift Aid does not work for people who pay no Income Tax but for the rest of us it works well and simply.
Fred, who pays tax at 40%, gives £80 to his local charity and signs a Gift Aid declaration. The charity gets not only his £80 but £20 back from HMRC, on the basis that this was a gift on which basic rate Income Tax had been paid.
That is not the end of the story. Fred gets relief as if he had given away the top £100 slice of his income. So his tax bill goes down by another £20 and his gift has really only cost him £60.
Less simple gifts of cash
Often a gift is linked to another transaction, such as entry to a stately home or museum. Here there is a calculation, so that the donor does not get a ‘free ride’. Part only of the gift qualifies for Gift Aid. A similar apportionment reduces the tax relief on other gifts.
Gifts of shares or land
This arises under Income Tax Act, 2007 (‘ITA 2007’). It is complicated and even tax books do not cover it in great detail. It applies, broadly, where an individual gives a ‘qualifying investment’ (such as shares, unit trust units, maybe land) to a charity. The taxpayer does not get relief automatically: it must be claimed and formalities observed.
Where the relief applies, there is a deduction from net income of the ‘relievable amount’. That is calculated by a formula but is, basically: the value of the gift; plus transfer costs; less any benefit to the donor (see s434 ITA 2007).
Inheritance Tax
Many kind people leave money to charity on death. This works well:
- Liquidity: the estate is wound up, the home and its contents sold or divided, and there is cash available that is no longer needed, say, for care fees.
- Good order: people who make wills have given at least a little thought to their family and other obligations and have set out what they want to happen to their estate.
- Tax: the way that money is left can reduce the tax liability.
Simple relief
Money left to charity will almost always pass on death free of Inheritance Tax (’IHT’). This applies even where the family, having been left the whole estate, decide to divert some of it to charity by means of a deed of variation, provided that the formalities are observed.
Lucy cared about her nieces and about her dog. She had been told that it was not possible, or certainly not easy, to make the dog a beneficiary under her will, which saddened her. She left her estate, which was large enough to attract IHT, to her nieces.
The nieces made sure that the dog would be looked after. Grateful for their inheritance, they signed a deed under which £25,000 would pass to a local pet charity. This saved IHT of £10,000 so the gift actually cost the family only £15,000.
This saved IHT of £10,000 so the gift actually cost the family only £15,000.
IHT Rate Relief
Most people will leave only modest gifts to charity, saving 40% on the value that would otherwise have been taxed, as in the example above. That often suits people who mainly want ‘to keep it in the family’. Another relief is available which may suit people with large estates or with only more distant relatives. This can apply where at least 10% of the taxable estate goes to charity. Where the conditions are satisfied, the rate of IHT on the estate falls from 40% to 36%.
Where the conditions are satisfied, the rate of IHT on the estate falls from 40% to 36%.
Gerald, a bachelor, is estranged from his relatives, who are all adult, and has no obligation towards anyone who might claim, under the Inheritance (Provision for Family and Dependants) Act 1975 (the ‘1975 Act’), that they have been unfairly disinherited. He has made no lifetime gifts. His simple estate amounts to £1,325,000. But for the charitable gifts and the relief, all of it above £325,000 would suffer tax at 40%. The tax would be £400,000.
Gerald leaves £200,000 to charity, the rest to friends and family. The legislation requires us to establish the ‘baseline amount’, which is in effect the taxable estate. Here that amount is £1,000,000. If at least 10% of this, so £100,000, goes to charity, the reduced rate will apply.
Ignoring administration expenses, for simplicity, the estate is: £1,325,000
less the charitable legacies -200,000
Less the Nil-rate band -325,000
Leaving taxable 800,000.
The 10% requirement is met.
The £800,000 is taxed at 36%, ie £288,000, a saving of £112,800.
As so often in tax, there are complications. If the estate includes joint property or trust property in which the person had an interest, there are other steps to the calculation.
Problem estates
A balanced view forces us to address difficult issues. Can it ever be a bad idea to leave money to charity by will? Only rarely, but the cases get much publicity. These are not tax issues but may be a real concern. There are two main problem areas: indolent executors and grasping relatives.
The job of a legacy manager of a charity is to see that his charity gets what has been left to it, no more and certainly no less. Where the gift is a legacy that is paid within a year of death, there is seldom any problem. Where the gift is a share of residue, the charity is, in many ways, much more closely involved. They will want to know that the estate is being well and diligently administered; that no steps are taken that result in too much tax being paid; that the executors do not engage in fruitless litigation; and that the accounts of the administration are true and accurate.
Legacy managers can recount horror stories where, for example, a dishonest executor has prepared two sets of accounts: one for the family, who might know the likely extent of the estate, and another (showing a smaller estate) with which to fob off the charities. Did the elderly aunt really owe so much on a credit card? Had she really engaged that health consultant? Sadly, the possibilities for fraud are legion and inexperienced executors may be deceived.
Sadly, the possibilities for fraud are legion and inexperienced executors may be deceived.
A charity will therefore often wish to exercise mild supervision of the administration. The executor, a family friend who may be doing the job for nothing, may find that irksome.
The other problem that is frequently litigated is where residue, or a share of it, has been given to charity whilst close relatives get little or nothing. The will is contested or a claim is made under the 1975 Act. Every case will be different and will turn on its own facts. If it can be shown that the testator had a close connection with the charity, whilst having had little or nothing to do with the family member, the charity may well be able to resist the family claim.
Much dispute could be avoided by three simple steps.
Sadly, one or two well-funded charities have built up a reputation for robust defence of their position in the courts. That may have discouraged some people from bequeathing money to charity, which is a pity. Much dispute could be avoided by three simple steps. The testator:
- establishes a close ongoing relationship with the charity, showing that he or she intends to benefit them;
- chooses a competent person to act as executor; and
- also actually speaks to relatives before death, to explain what he or she is doing and why.
Capital Gains Tax
There is relief from Capital Gains Tax (’CGT’) that is seldom discussed. It is contained in s257, Taxation of Chargeable Gains Act 1992. Where the conditions are satisfied, a transfer to a charity does not trigger a liability to CGT and the charity receives the asset on a ‘no gain, no loss’ basis. Since charities do not pay CGT, they can realise the gain tax free.
Alice inherited from her uncle’s estate. He died at the beginning of the pandemic, when share values were low and houses hard to sell. The pandemic delayed getting probate and selling the house.
Eventually, Alice received not only the house money but a small holding of shares in an oil and gas company. Meanwhile those shares had increased in value. As it turned out, Alice had made a gain on the house and had suffered CGT at the special high rate of 28%. As a confirmed environmental campaigner, Alice wanted nothing to do with oil companies and certainly did not want yet another tax bill for selling the shares. She therefore gave the shares to a ‘green’ charity, a genuine gift, expecting nothing in return.
As a result, whilst normally a gift may trigger a CGT liability, this one does not.
As noted above, there is also the possibility in this situation of relief from Income Tax under ITA 2007: good news for Alice.
Summary
These are difficult times for the young, the outcast and poor, both here and abroad. People who have managed to live within their means, and to save, daily receive requests for help from charities. The pandemic has put a tremendous strain on charities as well as many businesses, making their needs even more urgent.
With careful structures, the value of those gifts can be increased significantly by the use of tax reliefs.
After providing for close family, many will want to ‘do their bit’ to help less fortunate people. This article shows that, with careful structures, the value of those gifts can be increased significantly by the use of tax reliefs. All it takes is a little care and forethought – and perhaps some specialist advice.