Christmas is almost upon us which often makes us reflect on those less fortunate than ourselves and consider supporting charities by making gifts. There are several charity tax reliefs which will maximise the amount available to charities, so here is a quick refresh of how tax reliefs work, so that you can spread even more cheer this Christmas and into the New Year.
Gift Aid
Gift Aid is the charity tax relief that everyone has heard of, but few understand how it works. Gift Aid applies to cash gifts to UK-registered charities. It works by the gift being “topped up” by the government by 20% if you (as the donor) have paid sufficient tax. If you are a higher or additional rate taxpayer, then you get additional tax relief known as higher rate relief through your tax return. For example, if you make a cash donation of £100 and claim Gift Aid, the charity receives £125, and you receive additional tax relief of £31.25 through your tax return. So, the donation only costs you £68.75, and the charity received £125 so everyone is a Christmas winner.
Remember to qualify for Gift Aid, it must be an outright gift – so you cannot get anything in return. So, remember to watch out for those charity auctions. If you do participate in a charity auction during the Christmas period, there are a few practical points to consider. Gift Aid does not apply to the market value of the item that you are lucky enough to win. For example, if you win tickets to see Oasis at Wembley next year, Gift Aid does not apply to the market value of those tickets. If you do decide to bid an amount over and above their market value, the excess amount can be treated as subject to Gift Aid. So, if the tickets that you win have a market value of £100 and you bid £200, then the extra £100 can qualify for Gift Aid. You will, however, need to make two separate donations which can create a bit more paperwork but given the extra tax relief for both you and charity, it is worthwhile. If you are lucky enough to win a ‘money can’t buy’ prize, for example, dinner with the Gallagher brothers before attending their concert, then unfortunately Gift Aid is not available on the entire amount as there is no market value equivalent.
If you are one of the five million people who, according to HMRC data, submits their personal tax return in January, then this tip is for you. If you make a Gift Aid donation after 5 April 2024 but before you submit your tax return or 31 January 2025, then it is possible to carry back the donation to the prior tax year and claim your higher rate tax relief earlier. This can help with cash flow especially if you have a tax payment to make at the end of January. Not exactly Christmas cheer, but it might help to soften the blow of the new year.
Remember that since 6 April 2024, Gift Aid only applies to UK-registered charities. The previously more generous extension to charities within the EU has been changed post-Brexit. You can, however, still donate to UK-registered charities that carry out activities overseas and some of the larger charities have now set up UK branches that are registered with the UK charity commission to make it as easy as possible to receive donations.
‘Give As You Earn’
If admin is not your strong point and the idea of making a Gift Aid donation and then claiming tax relief through your tax return feels too much, then payroll giving could be the solution for you. Payroll giving (or ‘Give As You Earn’ as it is sometimes known) is the equivalent of your Christmas presents arriving already wrapped. Through payroll giving you request that a specified amount is donated to a UK-registered charity of your choice and through payroll with all the tax relief being given at source. So, if you are a 45% taxpayer, through payroll giving you get the full 45% tax relief up front with no need to claim anything through your tax return. Your employer needs to set up a payroll giving scheme for you to participate but, once established, it should be flexible. Many firms ask employees to consider gifting their first day’s pay to charity as a positive way to start the new year.
Donor Advised Funds
If you are someone is committed to supporting charities and makes multiple donations during the year but are not great at keeping records and therefore probably under-claim Gift Aid, then a Donor Advised Fund (or a ‘DAF’, as they are known) is something that you should consider. At the start of the year, you make a donation to your DAF account on which you can claim Gift Aid. You can then make donations from your DAF account to UK-registered charities in the usual way knowing that you have already claimed your Gift Aid. The DAF account looks after all the admin for you, and they often have advisors on hand who can help you to make the most of your charitable giving. There are many DAFs in the UK – some are even dual registered in both the US and the UK to ensure that they work for US taxpayers living in the UK.
Gifting listed shares
The gift of specific assets is often overlooked. Where a UK taxpayer gifts listed shares to a UK-registered charity, there are two tax reliefs. Any capital gain on the shares is exempt and the donor’s taxable income is reduced by the market value of the shares. For example, if your gifted shares are worth £1,000 to a UK-registered charity, any capital gain on those shares is exempt and your taxable income is reduced by £1,000. If you were an additional rate taxpayer, this would save you tax of £450. For this relief, the shares only need to be on a registered stock exchange which does not have to be FTSE, so they could be listed on the NASDAQ or elsewhere in the world.
Gifting land
The same relief for those supporting charities is also available on UK land rather than shares. This requires the donor to obtain a valuation of the land donated and requires a UK-registered charity to want to accept the gift which will depend upon how useful the land is to the charity or how easy it is to sell. As with listed shares, if a donation is made to a UK-registered charity, then any capital gain on the land itself is exempt and the donor’s taxable income is reduced by the market value of the land essentially receiving 45% income tax relief on the gift.
Charity donations in Wills
Gifts to UK-registered charities are immediately exempt from inheritance tax so there is no need to survive the gift by seven years. One relief that often gets forgotten is in relation to charity donations on death. If you leave more than 10% of your overall estate to a UK-registered charity on your death, your inheritance tax rate is reduced from 40% to 36% which is a substantial reduction. So, if you are making resolutions for 2025, one of these could be to review your Will and consider making use of this relief. With the number of inheritance tax changes announced in the Autumn Budget in October 2024, it would make sense to review your Will anyway, so perhaps use this as an excuse.
Supporting charities this Christmas
There are plenty of other ways to be philanthropic this Christmas time which do not necessarily involve a tax benefit but are equally important. If you are keen on supporting charities, you can volunteer your time, make non-cash donations such as food, toys, gifts, books, clothes etc as well as your professional expertise which can include patience and listening as well as other skills such as how to prepare for an interview. Since they are often under increased pressure at Christmas time, when it comes to supporting charities, every little helps.
In the words of a famous Christmas song “…and in our world of plenty, we can spread a smile of joy…”. So, if you are feeling charitable this Christmas, don’t forget the tax reliefs that can spread the smile of joy even further.
This article was written by Jo Bateson. Jo is a Private Client Partner at Mercer & Hole, based in our Lombard Street office in London.
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