Covid-19 charitable giving: make it part of your tax year planning
The pandemic has triggered huge demand for charities’ services, and many people have given more to charity in response. Doing this in a tax-efficient way helps both you and the charity.
The pandemic’s disruption has driven up demand for many charities’ services. At the same time, it has slashed charities’ income through the forced cancellation of fundraising activities and events.
The role played by donors is more vital than ever and an element of planning can make their giving even more effective by getting the most out of tax reliefs. After an extraordinary year in which some investments have delivered very strong returns, there is an additional reason to look hard at tax planning opportunities.
Cash gifts and gift aid: quick reminder of valuable tax breaks
Where the gift is cash, charities receive gift aid based on a 20% tax rate on the “grossed up” value of the gift. The grossed up value equates to the cash amount of the gift, plus the basic rate of tax already paid. Therefore a cash gift of £100 becomes £125 for tax purposes once it is “grossed up”. Higher rate and additional rate taxpayers pay tax at a rate of 40% or 45%. These taxpayers can reclaim the difference between the basic rate of tax claimed by the charity and the higher rate of tax they pay.
The table below sets out how this works. The crucial point is that while basic rate (20%) tax is reclaimed through gift aid by the charity, without you having to do anything yourself, the further relief (for 40% and 45% taxpayers, as shown in the last column below) is claimed via your tax return.
Any donations made between now and the current tax year end of 5 April 2021, will go on your tax return due to be filed by 31 January 2022.
|You are a...||You give||"Grossed up" value of the gift||Gift Aid claimed by the charity||Further tax relief for you|
|... basic rate taxpayer (20%)||£1,000||£1,250||£250||0|
|... higher rate (40%)||£1,000||£1,250||£250||£250|
|... additional rate taxpayer (45%)||£1,000||£1,250||£250||£312.50|
To claim the income tax relief you must have paid enough tax to cover the rebate. If, for instance, your income only narrowly pushes you across one of the higher tax thresholds, you may not be able to claim relief at that higher rate for all of your donation.
You can choose to give your rebate to the charity, too, so for instance an additional rate taxpayers’ original gift of £1,000 becomes a total £1,562.50, but there is no automatic process for this. You need to reclaim the further relief through your tax return and pass it on.
A planning window on cash donations: you can carry back the income tax relief by one year
It’s possible to ask HMRC to view your donations as if made in the previous tax year. So, for example, say you make a donation in July 2021. Provided you had yet to finalise your return for the tax year ending April 2021 (due by January 2022), you could declare that donation for the year 2020-2021. Why might this help? It could help if for example, you do not have enough tax liabilities in the tax year 2021-2022 to generate the full relief. By attributing the gifts to the earlier year you might be able to increase the overall relief available.
Donating shares and other qualifying investments
The dispersion of returns across different sectors was very marked in 2020, with some performing considerably better than others. For those investments with substantive gains, it is worth bearing in mind some useful tax perks associated with charitable giving.
The term “qualifying investments” refers to a range of non-cash holdings that you may want to give to charities. It covers listed shares – including those listed on London’s AIM market – as well as other holdings such as authorised unit trusts, investment trusts and land.
There are two major tax breaks associated with giving these assets to charities: income tax relief and capital gains tax relief. With planning, these can be made to work together to your advantage – and to the advantage of your chosen cause.
1. Income tax relief when you give qualifying investments to charity
You can reduce your taxable income for the tax year in question by the market value of the qualifying investments you give to charity. So, for example, a gift of shares worth £50,000 would reduce your taxable income in that year by the same sum. As with cash gifts (see above), there is no advantage where you do not have enough income tax liability to claim back the benefit. And it isn’t possible to “carry forward” or “carry back” your gift to future or previous tax years. One solution? With some planning, it might be possible to stagger your giving across several tax years in order to obtain maximum relief.
2. Capital gains tax relief when you give qualifying investments to charity
Many long-term investors have holdings with large gains which will be crystallised when they sell. Giving these holdings to charity erases the capital gains tax liability.
3. Both income and capital gains tax reliefs working together when you give qualifying investments
Take a 45% income taxpayer with a shareholding in which there is a large uncrystallised gain. They can give the holding directly to a charity with no capital gains tax payable. In addition, they can deduct the market value of the shares from their income for that tax year, providing tax relief worth up to 45%. This can significantly enhance the value of donations to charity and is the most common method of funding a charitable structure such as a donor advised fund (see below).
The extra planning flexibility offered by a donor advised fund (DAF)
From a planning perspective you may need to make your gifts of cash or other assets within a set timeframe. But what happens if you are not yet sure which charity you wish to benefit?
This is where a DAF – or “donor advised fund” – comes into its own. The DAF is an investment fund, operated by a recognised charitable organisation in partnership with a wealth manager like Cazenove Capital, which can accept inward investments in the form of cash, shares and other holdings. Tax relief is obtained at the points the funds are given to the DAF, and once inside the DAF account, the assets are ring-fenced for future charitable giving.
Any gift made to a DAF is irrevocable. But the donor, acting as adviser to the fund, can determine which charities benefit from any onward distributions.
The benefits are numerous. Not only is the account available to use as part of future financial planning arrangements, including estate planning, but it can be actively invested according to the donor’s preferences with the aim of growing the value over time. It can also become an efficient way of tracking donations and measuring their impact.
Charitable giving and tax: a note about bitcoin and other cryptocurrencies
Among the assets to have risen sharply in 2020 is bitcoin, with holders seeing approximately 400% appreciation in the past 12 months (and a lot of volatility in between!). HMRC is increasingly interested in bitcoin and other cryptocurrencies and has policies to deal with them. Gains made on the sale of bitcoin and other cryptocurrencies are, for example, liable to capital gains tax.
Under current regulations, bitcoin isn’t regarded as cash and so does not qualify for gift aid.
Nor does it qualify for income tax relief if you give your holdings directly to a charity.
But in the latter scenario you will not have to pay capital gains tax.
Capital gains and charitable giving: the bigger picture
As we’ve said before, we think it likely that – sooner or later – capital gains taxes in the UK will increase. That’s partly because the rates are currently low by historic standards and partly because taxation in totality is likely to rise in response to the pandemic.
In the light of that, we’re suggesting that many long-term investors could benefit now from a review of their holdings with an eye to capital gains tax. Investors’ aims in terms of charitable giving – for this tax year and those ahead – should form a key part of that planning.
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 reliefs from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. 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.