Tax within the context of philanthropic giving
In the UK higher rate taxpayers are able to claim back the difference between their highest rate of tax and the UK basic tax rate (20%) on their gross Gift Aid donation. This financial year the highest rate of tax has decreased from 50% to 45%, which means that on a donation of £100,000 the net cost to the donor will increase from £62,500 to £68,750. But, for some highest rate taxpayers, it is not too late to make a claim at the 50% rate.
Whilst many people find the Gift Aid system over-complicated, highest rate taxpayers may well have cause to celebrate one of the quirks of the system: Gift Aid can be backdated to be claimed against the last year’s income, and thus rebates given according to the previous year’s tax rate thresholds … provided that the donor’s tax return has not yet been filed.
This opportunity is unique to this tax year, as the higher rate of tax has changed, so there is an incentive to backdate gifts while donors have this window of opportunity.
Gifts of shares and how to handle them
Share giving is also a highly tax effective way of giving to your chosen charities – donating shares outright enables income tax relief at the highest rate while ensuring no capital gains tax liability.
Only 6% of global wealth is cash, and the beginning of this year was full of reports that the level of donations is decreasing year on year. With many charities struggling, and disposable income levels decreasing, there is a great opportunity in making gifts from assets. Not only does it have less of a direct effect on the donors’ pockets, but it also provides the charity with a flow of funds outside the donor’s direct disposable income.
Gifts of shares come with no Capital Gains Tax or Income Tax liability, so are a really tax efficient means of making a donation. There is a second option for donors – that they can sell the shares on at cost price to the charity, and then gift the profits if the shares’ market value is higher than the cost at which they are sold to the charity. Unfortunately, this incentive is not well known among the donor community, and charities are often not well equipped to handle a gift of shares.
When a donor makes a gift of shares, there has to be an on-going communication between the donor and the end Charity. This is where intermediary charitable organisations such as Prism the Gift Fund, Charities Aid Foundation and KKL really come into their own. They are usually familiar with gifts of shares, can administer the transaction, and liaise with the end charity. Once they have facilitated the sale of the shares, the money can be passed on in the much more manageable form of cash to the end charity.
So, key messages for the next few months for major donors in the UK
- Highest rate tax paying donors currently have an incentive to claim back Gift Aid on donations as if income tax was still at 50% – a 30% gross rebate on a Gift Aid donation.
- Share giving is highly underutilised, but has the potential to unlock a great new flow of funds into the charitable sector. For this, communication is key. Businesses, charities, and individual donors need to build an awareness of what it means to gift shares and how best to go about it.