Leaving money to good causes and paying less tax as a result would seem to be a win-win deal – yet few Scots are taking advantage.
More than half of people in Scotland have drawn up a will, leaving an average of £160,000. Yet while 75 per cent of people in the UK support a charity at some point in their lifetime, just 7 per cent leave a charitable gift in their will, according to a new report from Shelter Scotland.
The research by the homelessness charity – which has been published to mark national Remember a Charity Week (rememberacharity.org.uk) – aims to raise awareness of just how easy it is to bequeath a gift to charity on death.
Yet the greater appeal for many people may be the chance to slash the tax they pay in the process.
Britons gave some £11 billion to charity last year, with 1.1 million more people making donations than the previous year, figures from the Office for National Statistics show.
Yet more than £997 million in tax relief on charitable donations went begging, according to the latest tax wastage report from unbiased.co.uk.
That reflected low awareness of the reliefs available on charitable donations. However, a storm earlier this year over plans to cap the tax relief paid on charitable donations – a policy set out in the March Budget by the Chancellor, who later backed down on the proposals – helped highlight the financial advantages of giving to charity.
Whether it’s leaving a legacy, preventing heirs from being landed with a large inheritance tax (IHT) bill or using charity donations to reduce income tax liabilities, charitable contributions can provide some real financial benefits.
That just 7 per cent of people leave charity gifts in their will is a state of affairs that under-pressure charities are desperate to change.
There are two angles when it comes to the tax appeal of charity legacies. The first is that any money left to charity in a will is paid out before the estate is sized up for potential IHT liability.
The second is a recently introduced opportunity to slash 10 per cent off your IHT bill by giving to charity. Under rules that came into force in April, those leaving 10 per cent of their estate to charity pay a reduced tax rate of 36 per cent instead of 40 per cent on the amount of their estate that’s above the £325,000 IHT threshold.
Graeme Brown, director of Shelter Scotland, said: “At a time when funding for our national and local services is being cut, legacies form an important funding stream for Shelter Scotland, making it possible for us to reach even more families and individuals with our advice and support services.”
Small cash sums are welcome, too, he added. “Leaving just £10 can help us offer advice to a family or individual through our free national helpline. £500 can fund an after-school club for one month to help homeless children understand what is happening around them and to rebuild their self-esteem.”
There are potential drawbacks to leaving charity legacies in wills, however. Neil Mitchell, tax partner at Mazars Scotland, said: “This is tax-efficient as far as IHT is concerned, but misses out on potential income tax relief, primarily in the form of gift aid. There are planning opportunities here which can be undertaken with relatively simple amendments to wills, possibly through a short codicil.”
This tax relief is by far the best-known and most widely used charitable giving arrangement. Under gift aid, tax on donations made by individuals can be recovered by the charity to boost the amount it receives. For example, a charity can claim an extra £25 on a £100 donation by a basic-rate taxpayer.
Charities can only reclaim tax at the basic rate, but higher-rate taxpayers can use gift aid to extend their basic rate income tax band. This is generally done through self-assessment, where the relief can be donated to charity. “For a higher-rate taxpayer this would mean they could reclaim another £2.50 on the £10 donation. If this extra cash was then given to the charity, it would mean it received £15 in total from the £10 donation (£10 + £2.50 + £2.50 = £15),” Mitchell explained.
Having to go through self-assessment for this may put many higher-rate taxpayers off, given the paperwork involved, but it may well be worth the effort.
“For higher rate taxpayers this is throwing tax away as a claim in the annual tax return will generate a refund equal to 25 per cent of the donation for a 40 per cent taxpayer and 37.5 per cent for a 50 per cent taxpayer,” said Mitchell.
“It is amazing how gifts add up and if you don’t need the tax refund, claim it and donate it.”
To donate through gift aid you need to confirm you pay at least as much income or capital gains tax as the amount the charity is reclaiming.
“This is particularly important as the taxpayer will have an assessment raised against them for the charity’s basic rate reclaim should they not have paid enough tax,” Mitchell pointed out.
Property and shares are among the assets that can be gifted tax efficiently. Listed shares, offshore funds, open-ended investment companies (Oeics) and freehold and leasehold land all qualify for relief on income tax, capital gains tax and IHT.
The size of the rebate available is based on how much the asset is worth at the time of gifting.
“This is a very tax-efficient way of charitable giving,” said Mitchell.
He used the example of a 50 per cent taxpayer holding £20,000 of listed shares of negligible base cost. Selling the shares would give rise to a tax whack of £5,600, but that can be avoided entirely if the shares are instead gifted to charity.
“The taxpayer will have no chargeable disposal and will be able to deduct £20,000 from their income, realising a £10,000 tax saving,” said Mitchell.
The added benefit is that the charity can then sell the shares tax-free and get the full £20,000 from them.
Other assets gifted to charity usually qualify for capital gains tax relief. But gifting directly isn’t always the most tax-efficient method.
“Depending on the taxpayer’s profile and the base cost of the asset it may be advantageous to dispose of the asset personally and then make a gift aid donation from the proceeds, rather than gifting the asset itself,” said Mitchell.
GIVE AS YOU EARN
Payroll giving or the Charities Aid Foundation’s give as you earn scheme allows employees to make donations to charity straight from their gross salary – but after national insurance is taken off – reducing the amount of income tax paid at the highest rate. Availability depends on whether your employer offers the scheme. On the plus side, however, some companies will match individual donations up to a certain limit.
• For more details on tax-efficient gifting, visit www.hmrc.gov.uk/individuals/giving/assets.htm
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