Benefits of charitable giving
Saving tax may not be the main concern when giving to charity, but you might as well benefit if you can.
Any donations should be made under a gift aid declaration. Although there is no tax relief as such for basic rate taxpayers, a donation of £100 will be worth £125 to the charity. Higher and additional rate taxpayers save tax, so for an additional rate taxpayer, the net cost of a £100 gift is £55. If you are in the position that your personal allowance is tapered away (income between £100,000 and £122,000), then the net cost drops to just £40. Donations can also help preserve entitlement to tax credits and limit the impact of the child benefit tax charge.
Consider which family member will benefit the most from making donations – it will not necessarily be the highest earner.
Gifts of certain land, property and shares will save you both income tax and capital gains tax (CGT). The value of the donation is deducted from taxable income, saving tax at your marginal rate – which could be as high as 60%. There is also relief from CGT, which could be as high as 28% for residential property. Obviously, the amount of relief depends on how much the asset has appreciated in value.
Sales at less than market value also qualify for relief, so you can realise some money as well as save tax.
Inheritance tax (IHT)
Any donations you make in your will reduce the IHT payable on your estate. So if you leave more than 10% of your estate to charity, then the rate of IHT on the remainder is reduced from 40% to 36%. The actual amount required might be much lower than you think. For example, for an estate valued at £800,000 with 50% left to a spouse, donations of £7,500 are required.
You can avoid the need to continually revise your will with a clause worded so that a specific legacy to charity will always meet the 10% test.
Be warned that the detailed rules can be quite complicated, so please contact us for advice.