Every 5 September, the United Nations celebrates the International Day of Charity. Established with the objective of mobilising people around the world to help others through volunteer and philanthropic activities, the date also commemorates the passing of Mother Teresa, the Nobel Peace Prize winner.
While overall giving to good causes in the UK increased by £800 million in 2020, compared to the previous year, many smaller charities continue to struggle. The pandemic has meant cancellations of village fetes, quiz nights, abseils and countless other local events, vital for topping up the coffers of small charities.
Donating to charity can be a win/win. Not only do you help causes close to your heart, but it can also have tax benefits. Here are three ways that giving to charity can cut your tax bill.
1. Reduces the value of your estate for Inheritance Tax
If your estate is valued above the Inheritance Tax (IHT) threshold, your family could end up losing 40% of this to tax.
In the 2021/22 tax year, the IHT nil-rate band stands at £325,000. There’s also an additional “residence nil-rate band” of £175,000, which applies if you leave your home to your children or grandchildren.
So, if the value of your estate is more than £500,000 (or £1 million as a couple), you could end up paying IHT.
Donations to charity fall outside your estate for IHT purposes. So, you can make gifts to charity while you are alive and reduce the overall value of your estate, or you can leave money to charity as a legacy when you die. Both help you to avoid IHT at 40%.
The Telegraph recently reported that there has been a 61% increase in charitable bequests in wills in the last year. Co-op say that almost a third of all wills drafted last year included a gift to charity and more than 100 people make donations via wills every day.
If you leave a legacy to charity in your will you can also reduce the rate of IHT that you pay. If you leave at least 10% of the value of your estate to good cases, the rate of IHT charged on your estate will reduce from 40% to 36%.
2. Pay less Income Tax
Donating to charity can also help you to mitigate some of your Income Tax bill.
Gift Aid is a scheme available to charities that enables them to claim extra money from HMRC. The charity (or community amateur sport clubs) can claim an extra 25p for every £1 you donate provided you’ve paid the basic rate of tax and make the donation from your own funds.
If you pay tax above the basic rate, you can claim the difference between the rate you pay and the basic rate on your charitable donations. You do this through your self-assessment tax return, or you can ask HMRC to amend your tax code.
Another way to donate to charity tax-efficiently is by using a payroll giving scheme. If your employer offers such a scheme, you can give directly to charity from your pay before tax is deducted.
Doing this means you benefit from tax relief, depending on the rate of tax you pay. For example, if you donated £50 to charity through payroll giving it would cost you:
- £40 as a basic-rate taxpayer
- £30 as a higher-rate taxpayer
- £27.50 as an additional-rate taxpayer.
This can be an effective way for you to support good causes while mitigating the tax you pay.
3. Donate land, property or other assets and get Income and Capital Gains Tax relief
It’s not just cash donations that can benefit charities and help you to pay less tax. This is because you do not have to pay tax on land, property or shares you donate to charity. This includes selling them for less than their market value.
Here, you get tax relief on:
You pay less Income Tax by deducting the value of your donation from your taxable income. If you complete a self-assessment tax return, add the amount you’re claiming in the “charitable giving” section of the form.
If you do not complete a tax return, write to HMRC with details of the gift or sale and your tax relief amount. You’ll either get a refund, or your tax code will be changed so you pay less Income Tax for that tax year.
Capital Gains Tax
You do not have to pay Capital Gains Tax on land, property or shares you give to charity. Note that you may have to pay if you sell them for more than they cost you but less than their market value.
You should work out your gain using the amount the charity pays you, rather than the value of the asset.
Get in touch
If you have any questions about making charitable donations or how you can mitigate tax, please get in touch. Email firstname.lastname@example.org or call us on 01454 416653.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.