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How to make charity donations as tax efficient as possible
As we near the end of 2021, many people might be thinking about what donations to charity they plan to make this Christmas or before the end of the year.
Many people decide to gift money as part of their Christmas giving, but anyone planning to be charitable this year should make sure they’re doing it in the most tax-efficient way. It won’t impact the amount you give to charity – in fact some might even boost it – but it will mean that the cost of giving to good causes is often lower for you.
Last year as a nation we claimed £1.7 billion in tax back for giving to charity, a slight increase on the previous year, despite Covid meaning that many people’s ability to donate to charity was reduced.
THE TAX BENEFITS OF BEING CHARITABLE
1. Gift Aid
Higher-rate taxpayers can claim tax back on any money they’ve donated, they just need to tell the taxman what they’ve given to charity.
The charity also gets a boost to the money you donate, through Gift Aid. It means that for every £1 you donate, the charity can claim back 25p. You’ll need to fill in a form with the charity and be a UK taxpayer, and they do the rest of the work.
But higher-rate taxpayers can then claim back 20% relief on the full donation, while additional rate taxpayers can claim back 25%. So, if you donate £100, and the charity gets £25 back through tax relief, then a higher-rate taxpayer can get back 20% of the £125, which equals £25.
This effectively works by increasing your basic-rate tax band by the amount you donate. So, if you donate £1,000, your basic-rate tax threshold will increase from £50,270 to £51,270 in the current tax year.
2. Inheritance tax benefits
There’s a big tax break on offer if you leave money to charity in your will. If you leave 10% of your estate to charity the rate of inheritance tax paid on the rest of your estate is reduced.
That gift to charity from your estate is free of inheritance tax too and the rate on the rest of the estate, after gifts and allowances, is reduced from 40% to 36%.
Depending on the size of the estate, the tax saving on offer can be more than half the amount of the charitable donation, meaning that the cost of giving to charity is vastly reduced.
For example, someone with a £900,000 estate* would need to donate £90,000 to charity to be eligible for the reduction in inheritance tax.
The inheritance tax bill with no charitable donation would be £230,000 but after the donation it would be £174,000 – saving £55,400. That means the donation of £90,000 has only cost the estate £34,600.
3. Gifting assets and the tax breaks on offer
If you give certain assets, property or land away to charity you get a double whammy, as you don’t have to pay any capital gains tax on it, and you can claim income tax benefits.
You can donate assets such as listed shares, fund investments and property. If you do so you’ll be able to claim income tax relief on the market value of those assets, which means you reduce your taxable income by the value of the donation.
What’s more, you will not have to pay tax on any gains you’ve made on an asset if you gift it to charity. Ordinarily, you pay capital gains tax on any gains each year above the annual allowance (currently £12,300), at a rate of 10% for basic-rate taxpayers or 20% for higher-rate taxpayers, but this is wiped out if the asset it donated to charity.
For example, Jean (who is a basic-rate taxpayer) donates £5,000 worth of shares to charity. This means she can reduce her taxable income by £5,000, effectively giving her an extra £1,000 tax break (20% of £5,000). She originally bought the shares for £3,000 and has already used her capital gains tax allowance this year. Because she donated the assets to charity, she saves £200 in capital gains tax (10% of the £2,000 gain).
*Assumes the individual can use their nil rate band but isn’t eligible for the residence nil rate band. Assumes no other gifting or allowances are used.