IN FOCUS6-8 min read

Should I use cash or shares to fund my charitable donation? Ask an expert.

A combination can provide you with the greatest flexibility and maximise tax efficiency, allowing you to increase the amount you give.

10/07/2023
Tier 1_Business

Authors

Lyn Tomlinson
Head of Impact and Philanthropy

Our client, Robert, is a fund manager for a global asset manager. In each of the past two tax years, he has earned approximately £400,000, including an annual bonus. A significant share of the bonus is paid in his employer’s equity and, over a fifteen year period, Robert has accumulated shares now worth over £2m. Robert’s accountant has calculated that the shares have an embedded CGT liability of approximately £250,000. Following the recent sale of a buy-to-let property, he also has approximately £750,000 in cash.

Robert came to see us when he started to think about retirement. He plans to devote more time to philanthropy and wanted to find out how he could use these assets to efficiently fund his giving. Robert and his wife have sufficient additional wealth to provide for their retirement. Their two children are in full time employment and do not require financial support.

Key need

Robert had two particular goals on which he wanted advice. Firstly, he is interested in establishing and funding a suitable charitable vehicle to facilitate his philanthropy over the coming years. He is keen to do this while he is still earning in order to take advantage of the tax reliefs associated with charitable donations, allowing him to maximise his giving. Secondly, he is keen to reduce his exposure to his employer’s equity.  

Our solution

We agreed with Robert that a Donor Advised Fund (DAF) would be the best option. With minimal administration, this vehicle allows Robert to set aside a significant sum for charitable purposes and direct contributions as he sees fit. A DAF is treated as a charity and can therefore qualify for gift aid*. Donations to a DAF can be made using cash or shares or a combination of both.  

To achieve the greatest tax-efficiency, we recommended that Robert initially fund the DAF with cash and share donations each worth £400,000.

The cash donation can be “carried back” to the previous tax year, as long as a tax return for that year has not yet been filed. The income tax deductibility of the share donation only applies in the current year.

This resulted in income tax savings of 45% on c.£275,000 of the client’s earnings and 40% relief on c.£75,000 of their earnings, for both tax years.

Gift aid boosted the value of the cash donation by 25%, increasing the value of the cash donation by £100,000. 

The £900,000 donation to the DAF cost Robert just under £600,000.

Robert also avoided CGT on the shares he donated (worth approximately £50,000) and began the process of reducing his exposure to his employer’s stock. He is planning on making further gifts of cash and shares in the years ahead.

* At the time of writing, for every £1 contributed, UK charities can claim an extra 25 pence in Gift Aid. Donors must have paid sufficient tax in the year of the charity claiming the Gift Aid, otherwise HMRC will ask the donor for the balance. It is possible to “carry back” a donation under Gift Aid so that it is treated as being made in the previous tax year. To qualify, you must donate before you submit your self-assessment tax return (i.e. between 6 April and 31 January).


This communication is for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and relief from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any transaction or investment. Past performance is not a guide to future performance and may not be repeated. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Your capital is at risk when investing.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Authors

Lyn Tomlinson
Head of Impact and Philanthropy

Topics

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.