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How to donate to charity tax-efficiently

While many industries have been adversely affected by the coronavirus crisis and lockdown, the charitable sector has been hit particularly hard.

A recent report from the Charities Aid Foundation (CAF) found that charities were facing a double problem. Not only have donations decreased over the past three months, but charities have also reported an increase in demand for their services, putting them under pressure at a time when income has fallen.

Source: Charities Aid Foundation

While there have been some spectacular fundraising efforts during lockdown – you only have to look at the exploits of the likes of Captain Tom Moore and Marcus Rashford – charities have never needed your support more.

So, here are the various ways you can donate to charity tax-efficiently.

Use Gift Aid

If you are a UK taxpayer, charities can reclaim the basic rate of tax you have paid on your donation. So, a £1 donation is worth £1.25 to your chosen charity.

If you’re a higher-rate taxpayer, you can also claim back the difference between the higher rate and basic rate tax on the value of your donation.

As an example, if you’re a 40% taxpayer and you donate £100 to charity, they claim Gift Aid to make your donation £125. You can then personally claim back £25 (£125 x 20%).

Give directly from your salary

If you’re employed and your employer operates a payroll ‘Give as you Earn’ scheme, you can give directly to charity from your pre-tax salary.

This means you get tax relief, depending on the rate of tax you pay. For example, if you’re a basic-rate taxpayer, giving £50 would cost you £40. If you’re an additional-rate taxpayer (45%), giving £50 would only cost you £27.50.

Give through Self-Assessment

If you complete a Self-Assessment tax return and are entitled to a tax refund, you can choose to have all or part of the repayment sent directly to a charity of your choice.

This is called ‘Self-Assessment Giving’ or ‘SA Donate’. You can also ask the repayment to be made as a Gift Aid donation and HM Revenue & Customs will send your refund (plus any Gift Aid tax repayment) directly to the charity by electronic transfer.

Donate through your limited company

Donating through your limited company has a range of tax benefits, depending on exactly what you’re gifting to the charity:

  • Money – Your limited company can pay less Corporation Tax when it gives money to a charity or community amateur sports club (CASC). This is because you can deduct the value of the donations from your total business profits before you pay tax
  • Equipment or trading stock – Your limited company can pay less Corporation Tax if it gives equipment or items it makes or sells to a charity or CASC
  • Land, property or shares in another company – Your limited company could pay less Corporation Tax if it gives or sells any of these to charity. If you give these to charity (including selling them for less than they’re worth) you won’t have to pay tax on capital gains. You can also deduct the value of the gift (its ‘market value’) from your business profits before you pay tax. Note that you can’t claim for gifts or sales of shares in your own company
  • Sponsorship payments – Charity sponsorship payments are different from donations because your company gets something related to the business in return. You can deduct sponsorship payments from your business profits before you pay tax by treating them as business expenses, as long as the charity publicly supports your products or services, allows you to use their logo in your own printed material, allows you to sell your goods or services at their event or premises or links from their website to yours.

Leave a legacy in your will

When you die, you can leave everything to your spouse without paying any tax. After that, your estate is subject to the Inheritance Tax (IHT) threshold, currently £325,000.

Anything you leave over and above this threshold is taxed at 40% unless you leave it to an exempt body such as a UK charity. Charitable gifts left in your will fall outside your estate, enabling you to reduce the Inheritance Tax paid on your estate.

There are three ways of leaving a gift in a tax-efficient way to a charity:

  1. State in your will that you would like to leave a fixed cash amount to a charity of your choice
  2. Leave a specific item to a charity – for example, a property or shares
  3. Leave your entire estate, or a share of it, to charity, once gifts, taxes, debts and costs have been paid.

Your donation will either:

  • Be taken off the value of your estate before Inheritance Tax is calculated, or
  • Reduce your Inheritance Tax rate to 36%, if more than 10% of your estate is left to charity.

Get in touch

If you would like to maximise the tax efficiency of your charitable donations, or you’d like to find out more about leaving a charitable legacy, please get in touch. Please email hello@sovereign-ifa.co.uk or call 01454 416 653 to find out how.

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