With end of the tax year fast approaching now is a good time to consider tax planning to maximise the use of your individual allowances, reliefs and exemptions for the current tax year. Some of these will be lost if not used before the end of the tax year. HCF's auditors have prepared some advice below which we thought you may find interesting.
Gifts to charities attract tax relief in a special way that can benefit both the charity and the donor. Most donations are in the form of cash gifts, although relief can also apply to gifts of assets.
For every 80p donated to HCF the Government will top it up with a further 20p, so long as you can certify on a ‘Gift Aid Declaration’ that you will pay enough UK tax to cover that 20p. The charity gets £1.
If you pay tax at the higher rates of 40% or 45%, the good news is that you can make a further personal claim to tax relief via your PAYE code or Self-Assessment tax return - of 20p or 25p for every 80p paid.
For example, in 2021-22 Greg earns £55,000 and he and Sue have two young children and so they have child benefit of £1,788 per year. Ordinarily they would end up paying back £894. But for every £80 of donation by Greg, they recover £18 child benefit on top of the personal tax relief of £20 that he can claim. That’s a total £100 to the charity for a net outlay of £42. An effective rate of tax relief of 47.5% of the donation of £80 in addition to what the charity gets.
- So, for example, a gift of £80 will not only benefit HCF £100, but also attract personal tax relief for you of £20 or £25 thus reducing your net outlay to £60 or even £55.
- If you happen to be in the range where your income is enough to limit your claim to child benefit (where the higher earner has total income of £50,000 or more), then any charitable donations can directly repay you 1% of your child benefit for every £80 paid which would be worth at least £11 depending on how many children you have.
If your income is in the range above £100,000 where tax-free personal allowances are eroded by £1 for every £2 of income, your effective tax rate in that band would be 60%, and for every £80 donated your personal tax claim would be worth £30 instead of £20. So, HCF would get £100 for a net outlay by you of £50. Thus, you have obtained 37.5% of relief on your £80 donation in addition to what HCF gets.
Cash donations can also be made via payroll if an employer offers it.Other Tax Reliefs
Alternatively, you may prefer to donate some assets rather than cash to a charity. The most common example would be quoted shares. These might be standing at a capital gain, and if you were to sell them to donate the proceeds there could easily be capital gains tax (‘CGT’) at 10% or 20%. However, by directly donating shares you will not only avoid any CGT, but also receive the income tax relief described above based on the full value of the shares. For example, Tom has 5,000 shares worth £2.40 each – or £12,000 – and he bought them for 40p each. That’s a gain of £10,000. If he has used up his annual CGT allowance, then he would pay tax at 20% on the gain – or £2,000 – if he is a higher-rate taxpayer. By giving those shares to HCF, not only does he save the £2,000 CGT, but as a higher rate taxpayer he would get income tax relief of £4,800 (40% of the value). Note that the charity does not get the 25% extra this time because it’s not cash, but Tom gets the full the 40% relief (or 45% if he is a top rate taxpayer). The charity has received £12,000 of shares for a net outlay to Tom of £7,200 and he has avoided £2,000 CGT.
No Gift Aid Declaration is required here, and there are options with property where you could consider giving a time-limited lease to the charity which might revert to you or your family at later date, instead of an outright gift, if that’s what you wanted. Inheritance Tax
Charitable gifts via your Will are inheritance tax (IHT) free and in special cases where an individual donates 10% or more of their ‘baseline’ estate to charity, the IHT rate on the remainder of the Estate can fall by 4% to 36%. For example, an estate of £1.5m might pay IHT of £200,000 (on death of a second parent) leaving the beneficiaries a net amount of £1.3m.
Bequests to charity of £50,000 (enough for the 36%) would reduce the tax to £162,000. Net £1.288m
£50,000 given to charity for a total tax saving of £38,000 – or 76%. The beneficiaries lose only £12,000 Companies
Finally, companies can have tax relief on donations of money or assets to charities in different ways – even equipment or trading stock – including sales at undervalue or seconding employees, and sponsorship can count as a business expense for tax. For further information
If you wish to know any more about any of the tax reliefs discussed please contact Luke Gainham at Myers Clark Accountants.
Telephone: 01923 224411
If you would like to make a gift to support the work of HCF please contact Helen Gray, Foundation Director
Telephone: 01707 280339
If you would like to make an online donation, please click here.