HM Revenue and Customs: Sweet charity

High earners face tax increases, but we have some very good news

By David Barker, December 13, 2010

The crisis in the UK economy and the impending spending cuts have caused much disquiet in the charity sector. At the very time when these events are likely to create heavy demand on the sector's resources, donors are also going to feel the pinch and will be less inclined and less equipped to provide funding. But there is a silver lining for donors.

Oddly, this is to be found in consequence of a tax increase. Since April 6 2010, high-earning UK tax payers have faced two new thresholds:

● The tax-free personal allowance of £6,475 is progressively withdrawn by £1 for every £2 of income in excess of £100,000. Above £112,950, the personal allowance is fully withdrawn. Individuals unfortunate enough to have income between these figures face a marginal tax rate of 60 per cent on that slice of income.

● A new income tax rate of 50 per cent applies to income over £150,000 (42.5 per cent for dividend income).

Since charitable donations attract tax relief, for individuals paying tax at these increased rates, the tax relief achieved is commensurately enhanced. It has been many years since the marginal cost of making donations to charity has been as low as it is now for top-rate tax payers. So it is worth a refresher on the rules.

Cash Gifts

Cash donations can be made by Gift Aid. The gift is made net of basic rate tax, so if you want the charity to have £100, you write a cheque for £80. A declaration is given to the charity, which claims the basic-rate tax. Relief for higher-rate tax is claimed on the individual's tax return.

If certain conditions are met, the donor may elect for the Gift Aid donation to be treated as made in the previous tax year. This must be done by January 31, or the date the return for that prior year is delivered to HMRC, if earlier. This is not likely to be a good idea for the current tax year, as tax relief for the top-rate taxpayer will be less in 2009/10 than in 2010/11.

From April 6, 2010 it has been possible to make Gift Aid donations to qualifying charities in other EU member states and in Iceland and Norway. Previously, it was just UK charities.

Some donors open an account with the Charities Aid Foundation (CAF). The account can be funded by a lump sum or regular contributions, on which Gift Aid relief is claimed. CAF provides a cheque book, which you use to make the donations. CAF also offers a trust arrangement, which can continue beyond the donor's lifetime. Alternatively, a bespoke private charitable trust might be appropriate for substantial donations.

Gift Aid is useful for UK-resident but foreign-domiciled tax payers. They qualify for the "remittance" basis of taxation, under which tax is paid on UK-source income plus any foreign income or gains brought here. Foreign domiciliaries can therefore make offshore donations out of unremitted foreign income, which does not crystallise a tax charge and claim relief against their UK liability. Some care is needed in structuring this.

Gifts of other assets

It is also possible to claim tax relief on charitable gifts of quoted shares and certain quoted securities and land. Acceptable securities include units in an authorised unit trust and holdings in an offshore fund. Tax relief is claimed on the value of the asset given and there will be no capital gain on the disposal. It is expected that these reliefs will soon be extended to European charities. Charity reliefs can now produce significant tax savings, as well as targeting funds at deserving causes. A review of your arrangements may optimise the benefits both to you and the charity.

David Barker is a partner at Rawlinson & Hunter chartered 020 7842 2128.

Last updated: 12:03pm, December 13 2010