A UK Perspective on Charities and Charitable Giving

Profession:Charles Russell LLP
 
FREE EXCERPT

by Bart Peerless and Josh Winfield, Charles Russell Solicitors

Originally published in Private Wealth Advisor, February 2002

INTRODUCTION

The warm glow from doing a good deed is not the only benefit of giving to charity. Charitable gifts in the UK also carry potential tax advantages for the donor, which grow exponentially for those paying income tax at the higher rate. For the wealthier individual, creating one's own charity can also present the opportunity to make a significant difference to favourite causes through an entity that becomes a lasting source of family pride.

WHAT DO WE MEAN BY CHARITY?

A charity will qualify as such under English and Welsh law if its purposes are limited to one or more of the advancement of religion (not restricted to Christianity), the advancement of education, the relief of poverty, and any other purpose beneficial to the community (for example, the environment). A charity must also be for the benefit of the public. Gifts for political purposes are not charitable, although they carry their own tax exemptions.

CHARITABLE GIVING - THE TAX BENEFITS

The tax benefits of donations to charity are numerous, covering all the main taxes individuals pay on their UK assets. The benefits are also available to those who are not resident or are resident but not domiciled in the UK but have a liability to UK income or capital gains tax. Although increasing with the value of the gifts, these benefits accrue even to donors of small sums. The main tax advantages to individuals of charitable giving are summarised below.

Income Tax

Under current "Gift Aid" rules, higher rate (currently 40%) taxpayers making charitable gifts obtain substantial income tax relief. When a higher rate taxpayer makes a Gift Aid donation, the charity reclaims the value of the income tax chargeable at the basic rate (currently 22%) from the Inland Revenue. The client obtains higher rate tax relief by having his basic rate tax band extended by the "grossed up" value of the gift. Thus, a gift of £7,800 by a higher rate taxpayer to charity using a Gift Aid declaration is treated as if it were net of income tax at the basic rate. The charity claims an additional £2,200 (i.e. the basic rate income tax on the "gross" figure of £10,000) from the government. The client's basic rate income tax band (currently £1,881 to £29,400) is then extended by this gross figure. If he has income of at least £39,400, he saves £1,800 by paying tax at 22% on £10,000 of income that should have...

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