Charitable donations and the tax savings

English: The Oxfam shop in Galashiels After 36...

After much intense lobbying by the charity sector, the Chancellor’s attempt to cap tax relief on charitable giving (Budget 2012) was withdrawn.

Major donors to charities are obviously moved to philanthropy by considerations other than the amount of tax they can save, although they will want to make their donations in the most tax efficient way. Here is a roundup of some of the tax considerations to consider

  • To qualify for relief, cash donations need to be paid out of taxed income. Accordingly, charities can recover the 20% basic rate tax deemed to have been paid by the donor, thus increasing the cash value of the donation significantly.
  • 40% or 50% rate tax payers can claim an additional 20% or 30% tax relief on qualifying donations.

A gift can be made by way of an outright gift of a qualifying investment or land. In this case the Gift Aid rules set out above do not apply and the reliefs available are as follows:

Income Tax consequences:

  • The donor can claim Income Tax relief based on the market value of the investment or land on the date of the gift, or
  • If the donor sells the investment or land to the charity at less than market value. Income Tax relief is normally available on the difference between the sale price and the market value when the sale is completed.
  • In each case the relief is given by deducting the relevant value from income.

Capital Gains Tax consequences:

  • In the case of an outright gift, no chargeable gain will arise.
  • In the case of a sale at less than current market value, CGT will only be payable if the amount received from the charity is more than the base cost of the asset for CGT purposes.

Carry back bonus

It is still possible to carry back Gift Aid donations made in a current tax year to the previous tax year. The over-riding condition is that any election to make the carry back must be made prior to the tax return being submitted for the relevant year. For example, if a tax payer wanted to carry back a donation, made during the tax year 2012-13 to 2011-12, they would need to make the election prior to submitting their tax return for 2013.

In this way, higher rate tax payers are given an extended opportunity to maximise the tax effectiveness of charitable donations. If the additional rate of Income Tax is reduced next April to 45%, 50% rate, tax payers in this tax year (2012-13) may want to consider carrying back charitable donations made 2013-14 to the previous tax year to reduce liability at the higher rate.

Carry back does not apply to a gift of investments or land.