The icing on the cake

Derived from the Greek meaning for 'love of humanity', philanthropy can be interpreted as the way in which individuals discharge their moral and social responsibility. This may involve giving time and talents, but often tends to be more focussed towards the giving of money, in its wider sense.

Clearly from the perspective of the private client, the means by which such gifts can be made in a tax-efficient way will be an important consideration. This article seeks to review the available reliefs, looking at gifts made in life and on death.

Lifetime gifts - gift aid

In its simplest possible form, gift aid is a tax incentive that enables tax-effective giving of cash sums from individuals to registered charities. It was first introduced in the Finance Act 1990 for donations given after 1 October 1990, but was originally limited to cash gifts of £600 or more, and effectively superseded the old relief for gifts made under charitable Deeds of Covenant.

This threshold was reduced in April 2000, when the policy was substantially revised and the minimum donation limit removed entirely (a similar policy applies to charitable donations by companies liable to corporation tax).

Gift aid allows individuals who are subject to UK income tax or capital gains tax (CGT) to complete a simple declaration that they are a UK taxpayer. Any donations that the taxpayer makes to the charity following the declaration are then treated as being made after deduction of income tax at the basic rate. The charity is then able to reclaim the basic rate tax.

For basic rate tax payers, this means the value of their donation is increased by 25 per cent. Therefore a gift of £80 would be worth £100 to the charity, after £20 in income tax has been reclaimed.

Higher rate tax payers can personally claim income tax relief above the 20 per cent rate band. This is over and above the amount that the charities can claim back. Practically speaking this means they receive relief of 20 per cent, plus, for additional rate payers i.e. those paying at 45 per cent, they can receive relief of 25 per cent on that income.

An additional recent change with regard to income tax enables charities to reclaim gift aid on up to £8,000 per year of small donations, where a gift aid certificate has not been completed.

Income tax

Income tax relief on cash gifts has been available for many years. However gifts of assets other than cash did not attract income tax relief until the new income tax and corporation tax reliefs for gifts, and other arms-length disposals of assets to charity were introduced with effect from 6 April 2000 for individuals, and 1 April 2000 for companies.

The income and corporation tax relief is significantly narrower. In particular:

• Only certain assets qualify e.g. land, shares or securities listed or dealt on a recognised stock exchange, units in authorised unit trusts and certain offshore funds, and shares in open ended investment companies.

• The recipient must be either a charity or within the list in ICTA88/S507. The other bodies listed in schedule 3 Inheritance Tax Act 1984 (IHTA) do not qualify.

CGT relief

Relief from CGT is also available to donors where assets are gifted by individuals. Where an asset is gifted by an individual or transferred for a consideration not exceeding the allowable expenditure, which would be available on disposal of the asset, such a transaction is treated as made for a consideration producing neither a gain nor a loss.

When the asset is eventually disposed of by the charity, the acquisition cost is treated as being equal to that of the donee.

It is also possible to claim relief against income tax for certain gifts of land and buildings to charities and, additionally, where a property is sold to a charity for less than market value. This is in addition to the exemption from CGT on such gifts.

A 'qualifying interest' in land is the whole of the person's beneficial interest in a UK sited freehold or leasehold.

Where qualifying land is held by two or more persons, all of the joint owners must dispose of their holding to the charity if any of them are to be able to reclaim relief. In order for such a claim to be made, the charity must provide you with a certificate specifying the land and the interest in it that it has accepted.

Cultural gifts scheme

For tax years and accounting periods beginning on or after 1 April 2012, an individual or company making a qualifying gift of pre-eminent property (to be held for the benefit of the public or the nation) qualifies for a reduction in the tax liability equal to the percentage value of the property.

Pre-eminent property are defined as objects such as works of art or other items that are of national, scientific, historic or artistic interest. These could be pictures, books, manuscripts, works of art or anything that the relevant minister deems are pre-eminent.

A gain on such a qualifying gift is not a chargeable gain nor an allowable loss by virtue of the Taxation of Chargeable Gains Act 1992 section 258(1A); Finance Act 2012 schedule 14 paragraphs 34, 36.

It is also worth noting that it is explicitly provided that nothing in the provisions gives rise to any right or expectation that an offer to make a gift will be accepted.

Relief for such gifts is given by way of a total reduction in liability of the individual to income tax and CGT, equal to 30 per cent of the value set out in the agreed terms as the agreed value of the property concerned.

The reduction available can also be spread across any, or all, of the tax year in which the offer occurs and also the four following tax years (i.e. the donor is entitled to allocate the reduction to those tax years as he wishes) but the allocations must form part of the agreement. There are specific rules for the allocations of the reduction in liabilities and the timing of such claims.

Gifts made on death

Section 23 of the IHTA 1984 provides a general exemption from IHT for gifts made to charity. There are potential extensions to the general exemption at death where it is possible to obtain IHT and income tax relief on donations made on death, although HMRC is likely to scrutinise these arrangements very closely.

With effect from 6 April 2012, a new relief for gifts to charities was introduced whereby under the terms of an individual's will, if at least 10 per cent of the net value of an individual's estate is left to a charity, the IHT charge rate can be reduced from 40 per cent to 36 per cent on some assets.

The net value of an estate is the total value of all assets after deduction of debts, liabilities, reliefs, exemptions and anything below the IHT threshold of £325,000.

Of course it is worth noting that at present, it is still possible to amend a will after death by way of deed of variation, so jointly owned assets do not automatically pass to the other owners. However the chancellor has recently announced a review of Deeds of Variation due to suspicions that it is being used to evade inheritance tax.

Charitable trust

Another option available to individuals is to set up their own charitable trust and register it with the Charity Commission, as well as HMRC.

Once such a trust has been established, donations made by the individual to the trust will qualify as gift aid donations with all the advantages previously mentioned. The additional advantage of such a trust is that they can exercise more control of where the funds are distributed and when.

Subject to them not receiving any benefit from the trust (which create a tax liability) no tax should become payable by the trust, with certain exceptions.

Nevertheless those interested in philanthropy will always continue to make gifts to charitable causes close to their heart. However an understanding of the potential tax benefits is extremely important to ensure the available reliefs are maximised to ensure that the charity receives the most benefit.

Tim Norkett  is head of private clients and Peter Castle is a tax manager at Crowe Clark Whitehill