Charitable donations not only provide huge benefits to society but they can also be extremely tax efficient for the donor. Generally speaking, the more you give to charity, the less tax you pay.
The Gift Aid scheme was introduced by the UK government a number of years ago. It allows registered charities to reclaim income tax in order to boost the value of donations made.
Charities can reclaim the basic rate of tax which UK taxpayers have already paid on the donation. This means that for every £1 donated, the charity can receive £1.25.
Similarly, higher rate tax payers can also claim back the difference between the higher rate and the lower rate tax on the value of any donation. For example, 41% tax payers would be able to claim back 26.25p in tax relief for every £1 donated. This is a very valuable relief.
Leaving part or all of your estate to charity can also reduce your Inheritance Tax liability. Sums left to a registered charity pass free of Inheritance Tax as they don't count towards the total taxable value of your estate.
Moreover, since April 2012 the rate of Inheritance Tax can also be reduced from the standard rate of 40% to 36%, for those who leave 10% or more of their net estates to charity at the time of their death.
In practical terms, this means:-
- the total Inheritance Tax payable on the estate will be reduced;
- the higher the percentage of the net estate given to charity, the lower the Inheritance Tax will be; and
- other beneficiaries will benefit from the lower tax bill.
Gift Aid really is a simple way to boost the value of your donations during your lifetime at no extra cost to you. The Gift Aid rules require the completion of a Gift Aid Declaration Form which charities will be very happy to provide you with. It only applies to "gifts" and a charity can't use Gift Aid where people have received something in exchange for the donation or entered and won a competition, for example. It's important that all of the information requested on the Declaration Form is provided and is up to date.
It's also relatively easy to give a charity something in your Will. You can either leave a legacy, being a fixed sum of money or specific asset. Alternatively, it's possible to leave the charity a share of the "residue", which is the pot that remains after all expenses and other legacies have been paid.
It's important to take advice from someone who specialises in estate planning to help you work out what you can give away to charity to secure the lower rate. At the very least, the relevant clause in the Will should include:
- The name and address of the charity;
- The charity's registration number and its registered address;
- Some wording to cover the circumstances where the charity ceases to exist or merges with another charity and changes its name. It is common to include a clause which states that the Executors of the Will can pay it to a charity with similar charitable purposes in these circumstances but this would fully depend on your intentions;
- A receipt clause which allows the charity to accept the legacy and discharge your Executors from any future liability.
By following these steps you can support your favourite cause and reduce your tax bill at the same time; it really is a case of giving more and paying less!
This article first appeared in the Scottish Wildlife Trust magazine, issue 96 Nov