We all know there are tax benefits to making gifts to charity but do we always think how best to make these donations?

Gifting cash to the charity

The most common form of gifting - and if the donation is ‘gift aided’, there will be tax benefits for both the donor and the charity. 

The charity will be able to claim back an additional 25p for every £1 gifted and if the donor is a higher or additional rate tax payer they will also knock off 25p/31.25p from their tax bill for every £1 donated. 

It can get even better for individuals if their taxable income falls in either of the two quite punitive marginal tax bands – if their income is between £50,000 and £60,000 the tax saving could be higher as it will reduce the amount of child benefit claw-back, or more commonly for individuals who earn between £100,000 and £125,140 the tax saving could be 50p per £1 donated (on top of the 25p claimed directly by the charity) as they will be able to extend the band at which taxpayers start to lose their tax free personal allowance. 

It is also important to consider the timing when you make donations. Donations can be carried back one year on the tax return as long as this tax return has not already been filed – worth considering if one tax year you are in these marginal tax bands not the year after.

Gifting an asset to the charity 

Our client did not have much income in the year in question and so there would have been very little tax relief in gifting cash to the charity. We therefore discussed gifting an asset to the charity instead. If the charity is willing to accept the asset the gift could happen without a Capital Gains Tax charge.    

The charity would be able to sell the asset with no tax charge and the donor would be able to make a gift and save themselves a potential Capital Gains Tax bill. 

If the individual also had income in the year there might be an Income Tax deduction for certain qualifying assets (broadly listed shares and interests in UK land and property).   If the gift of an asset is a possibility for both the donor and the charity this is worth exploring as the combined Capital Gains Tax and Income Tax saving may exceed the tax reliefs for a gift aided cash donation. 

Understandably it is a big ‘if’ that the charity will accept the asset as you would be passing on the burden of administering and selling the asset to them, which the charity may not have the capacity to do. Sussex Community Foundation will accept a donation in the form of assets in certain situations so it is certainly worth a conversation with them if this could be on the agenda. 

Selling an asset to the charity

Our client was looking to gift a certain amount to the charity and was thinking of selling an asset worth more than the intended gift. We therefore discussed the possibility of selling the asset to the charity at undervalue to achieve the same result.  

For example, say some shares are worth £75,000 and the intended gift was £50,000. Our client could have sold the shares to the charity for £25,000.  

The donor would be in the same position – they would have £25,000 cash in their pocket but importantly the sale at undervalue to the charity could happen on a no gain/no loss basis.  Therefore, no Capital Gains Tax to pay (although worth noting that if the £25,000 proceeds was higher than original purchase price there would be Capital Gains Tax to pay). There could also be an Income Tax deduction if there is sufficient income and the assets were qualifying listed shares. 

The charity would also be in the same position – it would have shares worth £75,000 which cost them £25,000. The net donation to them is therefore £50,000 as intended by our donor. 

Again, this puts an administrative burden on the charity so it would need a discussion to see if something like this could be accommodated. 

Deed or Gift

In some cases, a charity may be reluctant to take on the management of an asset. The charity may accept the gift but ask the donor to sell the asset on their behalf. By signing a deed of gift, or exchanging letters, the donor may be able to achieve the same tax benefits while saving the charity significant administration and management time. 

In summary, it is always worth discussing alternatives with clients when discussing charitable gifting and always worth discussing with a representative of the charity to see if they will accept donations in the form of assets or sales at undervalue. I’m sure Sussex Community Foundation would love to have conversations like these with potential donors.