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How to magnify the impact of your charitable giving

The key motivation for giving money to charity is to see it do good and The EQ Foundation [1]has some helpful resources to enable you to find causes that resonate with you. But did you know that there are tax breaks that reward this behaviour?

British taxpayers made record-breaking gift-aided donations of more than £5.4 billion to charity last year, according to the Office for National Statistics — to which the taxman added £1.35 billion.

Here are a few we think you should bear in mind.

Gift Aid

This is the most well-known tax break and provides a 25% uplift to the charity receiving your gift (effectively replacing the basic rate income tax you paid earning this money). The registered charity will ask you to declare that you have paid enough tax to cover the relief they will claim. From much simpler beginnings we now have charities claiming Gift Aid on:

If you pay higher or additional rate tax you can claim further relief personally. The way this works is that more of your income will be taxed at basic rate than at these higher rates. So, a higher rate taxpayer saves a further 20% tax; for an additional rate taxpayer it’s 25%. You can claim this through your tax return or by contacting HMRC.

Example

James is a higher rate taxpayer. He gives £500 to charity. They claim £125 Gift Aid bringing the amount up to £625. As James pays Income Tax at 40%, he can claim back 20% of the £625 = £125.

You can also opt to ‘carry-back’ your Gift Aid to the previous tax year. This could be useful if your marginal rate of tax has reduced in the current tax year – for example if you were made redundant or retired. You need to make your claim at the same time as you submit your Self-Assessment for the previous tax year (eg before the 31st January deadline).

Paying less Inheritance Tax

If you decide to leave money to a charity in your Will this comes off the value of your estate before Inheritance Tax (IHT) is calculated – an immediate saving of up to 40% on the gift. However, if you decide to leave more than 10% of your net estate (assets less liabilities) the rate of IHT reduces from 40% to 36%. So not only would the charity benefit, but your other beneficiaries would lose less money to HMRC.

Example

Penny is planning on leaving her £2.5 million estate to her niece, Violet. If she died in March 2020 the first £325,000 would be tax free. The remaining £2.175 million would be taxed at 40%. Violet could expect to receive around £1.63 million. Instead, if Penny left £250,000 to a charity, then the rate of tax would fall from 40% to 36%. Violet would receive £1.557 million, which is just £73,000 less than she would otherwise have received.

Giving land, property or investments

If you give these to a charity, as well as getting Income Tax relief (the value of the gift is deducted from your total taxable income), you won’t have to pay Capital Gains Tax. Most investments qualify, but you should check the detail first.

ShareGift

If you have shareholdings that would be difficult to sell you can gift them to charity. The ShareGift [2] scheme allows these holdings to be aggregated and sold with the proceeds passed to charity.

What’s right for me

When we think about our giving, we need to balance our desire to be generous with taking responsibility for our own finances. Our financial planners can help you explore your options and use cashflow modelling to run through different scenarios.

Please feel free to give us a call on 020 7488 7110 or email us at enquiries@eqinvestors.co.uk [3] and we’ll be happy to help.