Individuals? gifts to charities

Whilst being a registered charity brings with it a degree of regulation that might not otherwise apply, the quid pro quo is the range of tax breaks such an organisation can enjoy. Chief amongst these is Gift Aid. In 2000 it was reformed to apply to companies’ and individuals’ donations, and replaced relief for gifts under deeds of covenant. Gift Aid enables charities to reclaim basic rate tax in respect of gifts of money made by taxpaying individuals to charities. There is no minimum limit on Gift Aid donations. In the tax year 2006/07 charities reclaimed some £830m in this way, but HM Revenue & Customs (HMRC) and the Charities Aid Foundation estimate that this may still be only half the possible amount.

The donor’s position

For every £1 that a basic rate taxpayer donates under Gift Aid, the charity can reclaim slightly more than 28p from HMRC. In the case of higher-rate taxpayers, the charity receives the same amount (i.e. £1), but donors can claim tax relief on the difference between basic and higher rate income tax on the gift, so reducing their actual cost to 75p. The reduction in the basic rate of income tax from 22% to 20% this year brought all kinds of problems: one of them being that the value of Gift Aid donations to charities was reduced. To compensate for this, slightly more than 3% of the value of Gift Aid donations is added to the charity’s basic rate tax claim: therefore the charity recovers 28p instead of 25p per £11. This uplift applies until 5 April 2011. Now might be a good time to remind regular donors that the value of their gifts is set to decrease, not only as a result of inflation but also because of tax cuts. [[Possibly more reliably and certainly with less administration than Gift Aid, arts charities can  take advantage of payroll giving]]

Administration and audit trail

It’s important to keep records of all your Gift Aid donations. Gift Aid declarations are needed from each donor and these must be kept so they can be inspected if required. It is not sufficient to note up a spread sheet; the actual document, or a recording of an oral instruction, needs to retained. A valid Gift Aid declaration needs to contain the donor’s name and home address, identify the charity and the gift or gifts to which the declaration relates and confirm that the identified gift or gifts are to be treated as Gift Aid donations. There should also be evidence to show that donors know they need to have paid sufficient income tax to match the amount reclaimed by the charity. HM Revenue & Customs sets out detailed guidance and suitable forms on its website.

A record of the sums received from each donor is also needed. For gifts by credit card or cheque this should not be a problem, but when cash is involved some form of envelope with a reference to identify the donor may be the best way of linking the receipt to the donor. The penalty for inadequate records, if an audit inspection visit is made, is that the tax incorrectly reclaimed will need to be repaid together with interest and possibly a fine.

Payroll giving

Possibly more reliably and certainly with less administration than Gift Aid, arts charities can take advantage of payroll giving. This is when a regular donation from an employee’s gross pay is passed from the employer to a payroll giving agency (PGA) that is allowed to deduct the greater of 4% or 25p from each transaction. The PGA then pass the net sum to the charity. Whilst the handling charge reduces the value of the donation to the charity, it avoids the need for Gift Aid administration and takes all the risk of incorrect or incomplete records away from the charity.

One potential disadvantage is that the employee is likely to think in absolute terms and make the same donation out of gross pay under payroll giving as he or she would have done through Gift Aid. With Gift Aid the charity can reclaim a further 28.2%, whereas under payroll giving it stands to lose 4% in administration costs.

There is no reason why the employees making the donations cannot be employed by the charity that benefits. The charity needs to select an appropriate PGA in order to put payroll giving in place for its employees. An Internet search on the term should provide details of several such agencies.

Non-cash gifts

Whilst Gift Aid technically applies only to gifts of money, certain unconditional gifts to a charity will be free of capital gains tax for the donor and also give rise to an income tax deduction for the donor, based on the market value of the gift. Land and buildings as well as certain shares and securities can all be treated in this way. However, not all charities will wish to accept such items. In addition, where the amounts involved are substantial, the donor might wish to take professional advice in order to determine whether it is better to sell the asset and donate the proceeds so the charity can take advantage of Gift Aid, or instead donate the asset itself. This allows claiming income tax relief on the value and saving capital gains tax. In certain circumstances Gift Aid can apply to gifts in kind if the charity sells the items on behalf of the donor and the donor then gives all or some of the proceeds voluntarily to the charity. Normal Gift Aid formalities will then apply.

Inheritance tax exemption

Gifts out of taxed income that can be covered by Gift Aid are not the only tax-favoured donations. There is no inheritance tax on gifts to charities, whether the donor is alive or dead when the gift is made. Generally, individuals who have made gifts worth more than £312,000 during their life, or on death, would pay inheritance tax at 20% or 40% respectively. Even with the slowdown in house price increases, many estates can see the effect of this tax break.