London commercial law firm and the UK's leading charity solicitors Bates Wells Braithwaite will be bringing you tax advice on charitable giving and investment through the City Philanthropy bulletin. Here Bill Lewis and Stephen Lloyd explain how to make the most of tax relief on charitable donations as the tax year draws to a close.
March heralds the advent of spring and along with the green shoots of nature we are now starting to see the genuine green shoots of economic recovery. Sadly the charity sector is lagging behind here and is still feeling the effects of austerity, so a gift made now would be of extra benefit to your chosen causes and will also be made in time for the end of the tax year on 5 April.
Cash donations are the most common method of giving to charity and allow the charity to claim gift aid on top of your gift and enable the donor to benefit from higher rate tax relief. For example:
Donor gives £100,000 to charity. Charity can claim Gift Aid on top of £25,000 so the gross value of the gift to the charity is £125,000. Assuming the donor is a 45% higher rate taxpayer, the donor can claim higher rate tax relief of £125,000 x 45% = £56,250, less the £25,000 in Gift Aid claimed by the charity, so their net tax saving is £31,250.
Taking account of the higher rate tax relief and the Gift Aid, a donation of £125,000 to a charity has cost the donor £68,750.
Gift Aid and the associated higher rate tax reliefs are generally only available on gifts to UK charities, but it is still possible to donate to overseas charities and benefit from tax relief by giving to an intermediary charity such as The Charities Aid Foundation which will then gift on to overseas causes.
Share donations are a less popular method of gifting to charity but can be extremely tax efficient. Provided the shares are listed on an H M Revenue & Customs recognised stock exchange the gift will benefit from both income tax relief and capital gains tax relief. For example:
Donor gives shares that cost £10,000 but are worth £100,000 to charity. Assuming the donor pays the top rate of tax they save capital gains tax on the disposal of £90,000 x 28% = £25,200. In addition they receive income tax relief of £100,000 x 45% of £45,000. The gift therefore attracts tax relief worth £70,200.
If the shares are unlisted or not listed on an H M Revenue & Customs recognised stock exchange then only capital gains tax relief is available.
Many charities offer a facility where they will buy shares listed on an H M Revenue & Customs recognised Stock Exchange from a donor at below market value which still enables the donor to benefit from income tax relief. For example:
Donor sells shares that cost £10,000 to a charity for £10,000 and the shares have a listed value of £100,000. Donor has in effect made a gift of £90,000. Assuming the donor is a top rate tax payer they receive tax relief of £90,000 x 45% = £40,500.
Donations paid after 5 April. If a donor wants to enjoy tax relief on share donations for the 2013/14 tax year then they must make their donation by 5 April.
However donations of cash made after 5 April can still be treated as tax effective and eligible for higher rate tax relief in the 2013/14 tax year. There is a facility on the self assessment tax return to claim for gifts paid after 5 April 2014 to be treated as paid for tax purposes in the 2013/14 tax year. The gift must be paid by the time you file your tax return in order to be carried back to 2013/14, and certainly by no later than the filing deadline for the tax return – that’s 31 January 2015 for tax returns filed online.