Gifts to Charity
Gift shares - be generous, save tax
Charitable giving in the UK approaches £10bn per year. This is a big number and reflects a nationwide generosity; but despite this those who can afford to do so should be encouraged to increase their financial support for charities many of which are still in great need of support.
There are generous tax allowances for charitable giving.
Gift Aid donations effectively obtain full tax relief at the donor’s marginal rate; this is achieved by allowing the charity to reclaim 25% of the gift from HMRC and giving the tax payer a further tax benefit of the marginal rates of tax. A cash gift of £100 attracts a tax reclaim by the charity of £25 and a tax payer with a marginal rate of tax of 45% obtains a further £31.25. Thus whilst the charity has received a total of £125, it has only cost the tax paying donor £68.75.
There is an Inheritance Tax (IHT) saving if a will stipulates distributions to charity, as charitable legacies attract no IHT. In addition, if the will provides for at least 10% of the estate be distributed to charity the IHT on the rest of the estate is reduced from 40% to 36%.
Capital Gains and Income Taxes
However, maybe the most generous allowances are given for those who make a donation to charity consisting of shares in a quoted company. This can attract tax relief of up to almost 65%. This sounds almost too generous to be true.
But it’s not, because a charitable gift of quoted share attracts two forms of tax relief:
- Capital Gains Tax (CGT): The disposal by way of the gift to charity is not subject to CGT. So, if the shares are ‘pregnant’ with gains this is a very attractive relief.
- Income Tax: In addition, the full value of the shares at the time of the gift are subject to Income Tax relief at the tax payer’s marginal rate of tax.
Take both these together and the taxpayer may obtain CGT relief of up to 20% (if the shares have little or no base cost) plus Income tax relief of up to 45%.
By way of illustration, let us assume a tax payer has some quoted shares valued at £10,000 which were originally acquired for £4,000, then the sums are as follows:
|Value of shares at time of gift||10,000|
|Cost of the shares||4,000|
|CGT saved at 20% of the gain||1,200|
|Income tax relief at 45% on value of gift||4,500|
|Total tax relief||5,700|
|Net cost of gift||4,300|
In this example the charity is receiving £10,000 and the cost to the donor is only £4,300, so tax relief of 57% has been given. Clearly the larger the inbuilt gain the greater the value of the tax relief.
So often investment policy is hampered by the CGT arising on any sales of investments with very large inbuilt gains. Both the taxpayer and the investment adviser are reluctant to sell such shares if this results in a substantial CGT liability. If instead the tax payer uses these shares to meet the aims for charitable giving then a generous gift can be made at relatively little net cost.
A donation of shares to a charity involves the charity in some additional administration as compared to a gift of cash. Also, if the donor has a very substantial value of shares with inbuilt gains it might be wished to spread the benefit to several charities via smaller gifts. To deal with both these issues the donor can make an initial gift of the shares to the Charity Aid Foundation (CAF) which will hold the funds in an account from which the donor can make individual gifts to nominated charities.
- To attract the CGT relief the shares gifted must be shares in a UK resident company with a full quotation on the UK market.
- The donor must not re-acquire the same shares within 30 days of the gift
- The charity must be a UK charity
- The charity will not benefit from gift aid tax repayment, the full relief is given to the donor.
- The donor must not obtain any personal benefit from the gift.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.