Tax within the context of philanthropic giving
There are a number of measures that encourage tax-effective giving to charities but they are often little used and sometimes completely forgotten. Many of them can be used though when advising would-be donors on their giving strategy and, when appropriate, recognising where donors’ overall planning may dovetail with their philanthropic aims.
All tax reliefs are designed to encourage giving, thereby generating additional income for the charity sector. However, for many, the most common approach to giving focuses on maximising income to charities, for example, Gift Aid. This approach can often overlook what may be in the donor’s best interests by instead maximising reliefs that benefit the charity. Indeed, it is not uncommon for a client to be advised to gift an asset which has inherent gains for to a charity while the additional and concurrent income tax relief gets forgotten. Tax reliefs which benefit the donor are important since they can drive donors to make a gift which they may not otherwise consider.
There are three main areas of tax-effective giving:
- Gifts of listed shares and securities
- Gifts to charities on death and use of the reduced rate of inheritance tax
- Gifts of land
Gifts of listed shares and securities
This relief is provided for in the Finance Act 2000. It provides that:
- A transfer of shares to charity is exempt from capital gains tax (CGT).
- The full value of the transaction is deductible from the donor’s income.
- It is available to individual or corporate donors.
- If any benefit is retained by the donor, the value of the transaction is reduced for tax purposes.
We acted for a client on a transfer of listed shares (worth over £1m) to charity. Our client was one half of the owner of a well-known interior design company who was starting to wind down their involvement in the company. They intended to sell their shares back to the company and use some of the proceeds to set up a charitable trust which would have resulted in a CGT charge on the sale. We advised them to:
- Set up a charity
- Transfer the shares to the charity in specie
- Let the charity sell the shares back to the company.
This is a great example of utilising reliefs to everyone’s benefit. There was no CGT on the transfer to the charity and full income tax relief on the value of the transfer was available to the client. Indeed, this was split across two tax years thereby securing two years of tax-free income.
The charity was funded at a much lower cost than expected and the charity then sold the original shares back to the company CGT-free. Other circumstances where it is important to remember the possibility of utilising this relief include the administration of estates with charitable residuary beneficiaries. Here it is always prudent to consider the transfer of shares by way of appropriation to avoid CGT. Naturally there are restrictions in place to prevent the rules being abused.
However, these won’t affect anyone relying on the rules properly. An example of a restriction would be to catch those who own shares for less than four years and fail to declare true acquisition cost.
Gifts to charities on death and use of the reduced rate of inheritance tax
It is well known that gifts to charities are exempt from inheritance tax (IHT) on death. In addition, the reduced rate of inheritance tax was introduced in 2012. Here, donors can achieve a discounted rate of IHT against their estate where they make a gift of 10% of their estate to charity in their will. In utilising this relief it is important to be aware of certain ‘tipping points’. For example, where a testator is already inclined to give something to charity (say 4% of their estate), then they can increase that gift to 10% without reducing the amount received by their nonexempt beneficiaries and, in some cases, increasing the amount received by them.
The calculation is hideous but there are a number of well-known examples available illustrating its effect at different levels.
In practice this relief has not been taken up as much as was hoped or expected. For my part, I have experienced a mixed response from clients: not all are driven by maximising the amount they can give to charity and it is normally utilised by clients without children. Typically, for any clients to be inclined to use it they must already plan to give at least 4% of their estate away, and highlighting the ability to increase the legacy without reducing the amount going to their children is crucial. Thus it is important to remember there may be multiple drivers for your clients.
Gifts of land
The relief associated with gifts of land to charities (introduced in 2002) is very similar to gifting shares and securities. Here:
- The whole of the title must be transferred. The relief is not available where a portion is transferred only.
- Full CGT relief is available on the value of the transfer and donors can deduct the full value from their income.
- The income tax relief cannot be split across more than one tax year.
- Any costs/expenses incurred are deductible, less any benefits/consideration received.
- It is essential to provide written evidence of the gift from the charity in order to secure the relief.
Owning land brings responsibility and work in dealing with a subsequent disposal. Consequently, charities may be unable or reluctant to accept such a gift. In these circumstances a donor can declare that the property is held on trust for the charity before sale. Here, the donor deals with the sale (with the charity meeting the costs) and then the proceeds can be transferred subsequently.
Please note the charity will not be able to Gift Aid the proceeds. Some argue it is simpler to sell the property and gift the proceeds. However, use of this relief may mean a charity benefits from a significant gift the donor may otherwise be disinclined to give, and, if so, then that is a positive thing.
I recently set up a charity for a client who transferred a property to a new charity. The transfer resulted in a large CGT liability (£200,000) which was avoided and enabled the client to set up a charity with a significant asset. The additional income tax relief was also welcome.
- Be clear about what is in the donor’s best interests – do the maths – what’s most tax efficient for them and in line with their overall aims.
- The timings of any transaction are always relevant, for example, which tax year it is.
- Remember that all reliefs are designed to encourage giving and boost income for the third sector and so utilising these reliefs is a good thing all round.