Giving to UK charities has long been tax effective for UK domiciliaries and non-domiciliaries alike.
Charitable giving may be of particular interest to non-domiciliaries as the tax reliefs available in the UK are available to all EU charities as well as UK ones, with the result that donations can be made to EU charities from foreign bank accounts without the need to remit any taxable funds to the UK.
In January 2013 a new type of charitable entity, a Charitable Incorporated Organisation (“CIO”), was introduced by statute. This is a new corporate structure designed specifically and exclusively for charities. In outline, unlike a charitable trust a CIO offers limited liability but it is less burdensome administratively than a charitable company. CIOs only need to register with the Charity Commission - unlike charitable companies they do not need to be registered at Companies House. This makes them attractive for smaller to medium sized charities. A charitable trust structure may still be appropriate for simpler grant-making charities but where limited liability is desired (e.g. because the charity employs individuals and enters into contracts) a CIO may be a useful alternative to a charitable company.
HOW TO GIVE TO CHARITY
The method by which you give to charity very much depends on how much involvement you would like to have with the application of your funds. There are 3 main options:
Donate a sum or an asset to an existing charity. If this is the route you choose, you can give directions as to how you would like your donation used, but you have very little control over either the ultimate destination of the funds or the timing of any tax deduction. This may be suitable for simple lump sum giving.
Set up a charity account with a gift fund such as the Charities Aid Foundation or Prism The Gift Fund. Such charities are set up to provide assistance to you in the administration of your giving. You will still decide when and where to give your money, but you will have an adviser to help you meet your giving objectives and you will have more control over the timing of any tax deduction. This may be suitable if you would like a longer term involvement and envisage giving larger amounts of money. There is often also an option to set up a charitable trust with the gift fund, allowing you to focus on charitable giving while the gift fund deals with setting up and running the charity.
Create your own charitable trust, charitable company or CIO. This allows you to give in a tailor-made way to causes which may not already benefit from an existing dedicated charitable fund. Your chosen charity trustees (of which you can be one) will have control of the funds and the charity’s constitution can be drafted in line with your particular charitable criteria. You would also have more control of the timing of any tax deductions. This is an ideal option for people wishing to have a longer term, hands-on involvement in the gifts being made and also for parents wishing to introduce their children to the idea of running funds.
THE TAX EFFECT
Whichever option you choose for benefitting a charitable cause, the tax benefits are as follows:
Gift Aid donations made by individuals are treated as having basic rate tax deducted by the donor. Charities take your donation - which is money you have already paid tax on - and reclaim basic rate tax (20%) from HM Revenue & Customs on its 'gross' equivalent (the amount before basic rate tax was deducted). Therefore, if you give £100 to charity using Gift Aid, it’s worth £125 to the charity.
Moreover, if you pay higher rate tax, you can claim the difference between the higher rate of tax (at 40% or 45%) and the basic rate of tax 20% on the total 'gross' value of your donation to the charity.
GIFTS OF QUALIFYING INVESTMENTS
As a rule, you are not liable to pay capital gains tax on capital gains when you make a gift of assets, such as land or stocks and shares, to a charity.
Since 6 April 2000, individuals have also been able to claim income tax relief on gifts to charity of certain shares, securities and other investments. The shares or securities must be listed on a recognised stock exchange (such as London) or on the Alternative Investment Market (AIM). The relief was extended from 2002 to include gifts of land or buildings. This relief is available in addition to the relief from capital gains tax set out above.
You should deduct the relief when you calculate your income for the tax year in which you make the gift. For an outright gift, the amount you can deduct from your taxable income is, generally speaking, the value of the net benefit to the charity (i.e., usually the open market value) at the time you give them the qualifying investment.
Income tax relief generated by gifts to charity (whether under Gift Aid or by making a gift of a qualifying investment) can only be used in the tax year in which the gift is made. Therefore, the timing and size of donations can be important in terms of optimising your overall tax position.
Anti-avoidance provisions apply to these tax reliefs to prevent individuals claiming a tax deduction and also receiving financial advantage (directly or indirectly) from the charity. These anti-avoidance provisions were broadened in April 2011 (replacing the old “substantial donor” rules) so that where a donor makes such a “tainted donation”, not only is the charity unable to reclaim the basic rate tax, the tax relief is no longer available to the donor.
For further information about charitable giving please telephone or email Stuart Skeffington, or your usual contact at Stevens & Bolton LLP.