As the world battles COVID-19, companies and individuals are responding in whatever way they can to contribute towards efforts to control the virus. From Mercedes F1 to BrewDog, firms are shifting their production lines to ventilators and hand sanitizers to do their part to combat the coronavirus.
Individuals are contributing too, in their millions in fact, by providing financial donations to support charities that are working to lessen the impact of COVID-19. These donations range from small to large and some individuals will even be looking to set up or focus their own philanthropic efforts towards organizations which are responding to the pandemic.
In many instances, these charitable efforts will be straightforward gifts, but for those on higher tax rates or who want to gift more than just money, carefully planning the way they give can help to avoid unnecessary tax charges or even unlock more funds for the important causes they want to support.
Gift Aid and Tax Relief
The most common form of charitable gifting in the U.K. is through cash donations via the government’s Gift Aid scheme. The scheme allows registered charities to claim from HM Revenue & Customs (HMRC) the basic rate of tax (20%) their donors have paid, with organizations able to increase the value of the donations they receive by 25%. This is because the donations charities receive are viewed by HMRC as pre-tax income—so for every 1 pound donation, for instance, the charity can claim an extra 25 pence by reclaiming the tax that an individual has already paid.
What many individuals will not realize though, is that in some instances they can claim tax relief on their donations by declaring these in their yearly self-assessment. While there is no tax relief for basic rate taxpayers, those on higher rates can get tax relief of up to 25%. There is, after all, a tax gap between the 20% charities can claim and the 40% tax higher rate payers will be paying on their income.
Through Gift Aid, individuals can declare these donations in their self-assessments to claim back the outstanding 20% tax. This could be reclaimed as income, but importantly it could even be used for further donations. Additional tax rate payers who pay up to 45% and those that take a reduced personal allowance could yield an even higher rate of tax relief, which could help to free up yet more funds for charitable efforts.
The important thing to remember is to declare these donations in the Charitable Giving section of an annual self-assessment. If an individual has donated funds in the four years preceding the current tax year, they can also submit a claim for tax over-payment.
Don’t Get Stung
However, if a donor is intending to claim tax relief on their Gift Aid donations, they could face a tax charge if they have not considered their own circumstances.
Donors will need to be careful when making gifts to charity as a tax charge can arise if the Gift Aid relief exceeds the U.K. tax paid by the individual during the tax year. The donor will need to have paid sufficient income or capital gains tax in the U.K. for a charity to claim the additional 25% of the donation. This means the donor will need to complete a Gift Aid declaration to confirm they are a U.K. taxpayer and charities will need to be registered in the U.K., an EU member state, Norway or Iceland.
One option for donors to avoid any unnecessary tax charge is to consider carrying back the relief of Gift Aid contributions to the previous tax year. In this instance, someone donating in 2020–21 can use a carry-back facility to claim their donations as part of the 2019–20 tax year, up to the date they send their return.
Tax relief is also generally only available on qualifying donations, i.e. when a donor receives no benefit themselves as a result of gifting the money; but this can depend on the nature of the benefit (for instance if the benefit is relatively trivial). For any individual who is planning to make a donation in these circumstances, it is important to check through the “small print” rules on donating via Gift Aid and, if unsure, seek professional advice before proceeding.
It’s Not all About the Money
It is easy to assume cash is the be all and end all of donations, but gifts to charity can also be made with assets as well. Donating through assets can be a more tax-efficient way of giving and can be more appropriate if an individual wants to support a cause but needs to maintain liquidity by keeping “cash in hand”, so to speak.
The types of assets that can be gifted range from quoted shares and units in an authorized unit trust (AUT), to shares in open-ended investment companies (OEIC) or even land and buildings. The donor will receive a deduction against their income for the value of the assets they have gifted and for a higher rate taxpayer this could give effective income tax relief of 40%, or 45% for additional rate taxpayers.
Donating assets can also be an effective way of removing the capital gains tax that would have been incurred if a donor sold shares or property to provide the gift as cash to a charity. By donating assets instead, individuals can avoid capital gains tax of up to 20% (or 28% if selling a property) that would have been levied if the asset was sold with a realized gain.
In essence, gifting the asset instead could leave charities with more funds than if the asset had been sold to provide a cash gift. However, anyone donating to a charity in this way will need to bear in mind that any income accrued to that asset will be received by the charity following the gift.
These are clearly unprecedented times we are living in and with the global response and focus on COVID-19, we are likely to see more individuals donating to and supporting organizations that are battling the virus. For those that do want to give, considering the various reliefs and measures, planning their donations and even seeking advice could help them make the most of the support they want to provide.
Marc Beattie is Chief Operating Officer at Arlo Wealth and Finn Houlihan is a Director at Arlo Group, U.K.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.