Tax-efficient ways to give

Many of us will have received emails and letters from charities asking for extra help as the effect of the coronavirus takes its toll on charitable giving.

Alzheimer’s Research UK is just one of many to be struggling. Its Chief Executive, Ian Wilson, says: “At the moment we predict our income may drop by as much as 45% as a result of Covid-19. That, in turn, will mean less money to fund pioneering research.”

Christian Aid, which has had to cancel its annual spring door-to-door collection, expects a £6 million drop in unrestricted income this year, at the same time as it braces for a humanitarian crisis in developing-world countries struck by the pandemic. Hundreds of charities with High-Street shops are also losing valuable revenue streams.

It is estimated the sector will miss out on at least £4.3 billion over the period from late March to the end of June.

It is estimated the sector will miss out on at least £4.3 billion over the period from late March to the end of June, and the figure could be higher if lockdown is extended.

We would always encourage you to take advice before making significant and irrevocable gifts. It can be tempting to give more than you can afford. But if, in the light of this crisis, you are keen to give, there are several ways of doing so tax efficiently.

1. Gift aid

Registered charities can claim an extra 25% from the government on all donations that are gift-aided. The government essentially offers back the basic-rate element of any tax paid on earnings donated.

It may seem strange that the basic rate of tax is 20% but HMRC gives back 25%. This is because the impact of a 20% tax is to reduce £1 of income to 80p. For HMRC to round that back up to £1 it has to add 25% to the remaining 80p. 

Higher-rate (40%) and additional-rate (45%) taxpayers can claim back the difference between the basic rate of tax and the tax they paid — usually by claiming it off their next income tax bill. Many forget to do this and lose out on a valuable benefit. It is worth keeping a note of all gift-aided donations during the year to make this claim.

 Registered charities can claim an extra 25% from the government on all donations that are gift-aided.

So if an additional-rate taxpayer gives £1,000, for example, the charity can claim an additional £250 from HMRC — and the donor can claim back £312.50. This means a £1,250 donation has actually cost just £687.50.

Lifetime memberships of some charitable organisations, such as the National Trust and the Royal Horticultural Society, can be eligible for gift aid. Now might be a good time to take out such a membership to help organisations facing cashflow challenges. Always check first with the charity that an expensive life membership is eligible for gift aid — the rules are complex.

2. Gifting shares

Assets that do not have the protection of a “tax wrapper” — such as an ISA or a pension — are liable for capital gains tax (CGT) on disposal. We each have a £12,300 CGT allowance. You can share assets with a spouse or civil partner without triggering a CGT event, which means you can potentially double this allowance if selling assets.

Imagine, for instance, that you bought 1,000 shares at the end of 1989, priced at £2.40. Today they are around £24. Your initial investment of £2,400 would today be worth ten times that and you would be looking at a gain of around £21,600. Selling these shares now could incur a 20% CGT charge of over £1,800 for a higher-rate taxpayer.  

Charities do not pay CGT, so it is worth considering them when looking to dispose of shares that have significantly risen in value since you bought them. You can make a donation by using a stock transfer form, and a charity can then sell the shares without incurring a CGT charge.

Neither you nor the charity can claim back any income tax, as you can on gift-aided donations. Nonetheless, in some situations this might be a smart way of managing donations. Certainly, it is worth discussing the matter with your adviser if you have shares you would like to gift.

3. Leaving money in a will

Your inheritance tax (IHT) rate is reduced from 40% to 36% if you leave 10% or more of your ‘net estate’ to charity.

Many people are taking the opportunity of lockdown to review their estate planning. Your inheritance tax (IHT) rate is reduced from 40% to 36% if you leave 10% or more of your ‘net estate’ to charity. ‘Net estate’ is the element of your estate that is liable for IHT.

If your net estate is £500,000 and you are leaving it to your family, they will receive £300,000 after IHT has been applied. If you donate 10% to a charity then your family will receive £288,000. In other words, your chosen charity will have received £50,000 but the gift has cost you just £12,000.

As Figure 1 shows, if you were already planning to leave 5% to a charity, your family will actually be better off if you lift it to the 10% threshold. This is because the IHT rate applied would still be 40% at the lower rate of donation. The charity has received £25,000; the remaining £475,000 estate faces a £190,000 tax charge. Your family are left with £285,000 — £3,000 less than if you had doubled the charitable donation.

The rules are complex so it is worth seeking professional advice when drawing up your will.

Ethical debate

There is some ethical debate around whether it is morally acceptable to exploit these tax-efficient giving opportunities. FT columnist Merryn Somerset Webb has argued, for example, that by so doing you are denying the Treasury much-needed revenue to pay for public services.

This argument is unlikely to sway hard-pressed charities in the current climate. We take the view that the government offers these generous tax facilities to encourage your generosity.