• Date

    18 Mar 2022
  • Category

    Tax, Private Client

Planning for charitable tax reliefs before 5 April 2022

Charitable tax reliefs can be extremely valuable for those who are philanthropically minded. Now is the time to review your position for 2021/22 to ensure that any planning can be put in place before the end of the tax year.

What charitable donations attract tax relief?

Charitable reliefs can be claimed for both cash donations to charities and qualifying gifts of investments and land to charities.

Tax relief for gifts of cash to charity

Relief for cash gifts to charity is given in two different ways:

  • The charity can claim basic rate tax relief from HMRC at a rate of 25% (the rate is higher than the 20% basic rate of tax to reflect the fact that the donation has been made out of net income). For example, if a donor made a £400 donation, the charity would be able to claim back an additional £100 from HMRC (£400 x 25%).
  • The donor can claim higher rate or additional rate relief from HMRC via their tax return. Relief is available on a grossed up value which takes into account the basic rate relief claimed back by the charity. This means that a higher rate taxpayer would be able to claim relief worth £100 on a £400 donation (£400 donation x 100/80 gross up x 20% rate of relief) and an additional rate taxpayer would be able to claim relief worth £125 (£400 donation x 100/80 gross up x 25% rate of relief).

Relief can either be claimed in the tax year when the donation is made or in the immediately preceding tax year, provided that the donation is made before the original return for that year is submitted and before the submission deadline for the return. The carry back claim must be included in the original return and not in an amended return.

In order to be able to claim the relief, the donor needs to provide the charity with a completed gift aid declaration form in the correct format. The charity should be able to provide this form to the donor for completion. The gift aid declaration can be made for either a single donation or for multiple donations. It is also possible to backdate the declaration by up to four years, which means that the charity can claim back additional tax from HMRC for that period (assuming that the donor has paid sufficient income tax and capital gains tax to cover the reclaim).

Tax relief for qualifying gifts of investments and land to charity

The investments which qualify for relief include listed shares or securities, units in authorised unit trusts, shares in open-ended investment companies and interests in offshore funds. Qualifying interests in land can be either freehold or leasehold. The entire beneficial ownership of the asset has to be given away to qualify for relief.

The relief is given by deducting the value of the asset gifted from the donor’s taxable income for the year. So, for example, a donor who has taxable income of £100,000 and a marginal tax rate of 40% will benefit from tax relief of £4,000 if he gives listed shares worth £10,000 to charity (£10,000 reduction in taxable income x 40% tax rate).

For capital gains tax purposes, the investments or land are deemed to be gifted at a value which means that no chargeable gain or allowable loss arises on the transfer.

Where land is given the charity must provide a certificate which describes the qualifying interest in land, specifies the date of disposal and states that the charity has acquired the qualifying interest.

Tips and traps

Although the concept of charitable tax reliefs is relatively simple, the legislation is complex and there are a number of planning opportunities that can easily be missed. In addition, there are some nasty traps which can catch out the unprepared. Some of these are summarised below, but you should always take specific advice on how these apply to your own circumstances before acting on them.

Do's

Don'ts

Do review your expected income tax and capital gains tax position before the end of the tax year to make sure you have maximised your opportunities for claiming relief for charitable gifts.

Don’t make gift aid donations which are so large that the charity claims back more than you have paid in income tax and capital gains tax. If you do this, then you will have to pay additional tax to HMRC to cover the shortfall.

Do consider maximising charitable donations in years where either your income is at a level where you are subject to the High Income Child Benefit Charge (between £50,000 and £60,000 for 2021/22) or where your personal allowance is being phased out (between £100,000 and £125,140 for 2021/22). Relief can generally be obtained at higher rates than normal in both of these situations.

Don’t make payments for goods or services on behalf of a charity or, if you volunteer for a charity, don’t forgo an expense payment in order to benefit the charity. Neither of these will benefit from gift aid relief, so you should instead make a cash gift to the charity.

 

Do consider gift aid carry back relief for cash donations if you have missed the deadline for making current year donations or if you need greater flexibility to either claim the donation in the current or immediately previous tax year.

Don’t make an incorrect gift aid carry back claim or make a gift aid carry back claim after you have submitted a return for the year for which you are claiming relief. If you do, then you will lose the ability to carry back your donation.

Where a donation is made from a joint account, do make it clear to the charity which party the donation is from and ensure that they have signed a valid gift aid declaration.

Don’t benefit personally from your donation in any way, otherwise gift aid relief is likely to be denied (there are limited exceptions and you should seek advice if these might be relevant).

Do consider selling investments or land before gifting the proceeds to charity if these are standing at a loss. Gifts of investments and land to charity are deemed to be made on a no gain, no loss basis, so any loss will be wasted if the assets are gifted direct.

Don’t make a gift aid donation in cryptocurrency. This is not considered to be legal tender and therefore will not count as a donation of money for gift aid purposes.

 

 

Want to know more? Get in touch

If you are interested in more details on tax reliefs for charitable giving, including inheritance tax reliefs, or would like to discuss the reliefs available in further detail, please get in touch with a member of our Tax Team or your usual Azets contact.

Download our full Personal Year End Tax and Financial Planning Guide 2021/22 

Are you aware of the tax reliefs and allowances that you may be entitled to? If you are unsure, then you are probably paying more tax than necessary. As the end of the tax year approaches, now is the time to act to potentially reduce your tax liability.

In our guide, we summarise the different tax-saving options available, profiling the different measures you should consider to maximise your tax efficiency, which could lead to those all-important cash tax savings.

Click here to download.

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