12 November 2010

Effective Charity Giving - II - Other Taxes and Higher Rate Taxpayers

In the previous article I looked at Gift Aid and Payroll Giving. But there are other ways of giving to charity which enable it to be as effective as possible, both for you and for the charity. “Effective” generally means saving tax and that’s what we will look at here.

I mentioned previously that higher rate taxpayers could reclaim the difference between higher rate tax and basic rate tax on donations made via Gift Aid. In effect, your basic rate allowance is increased by the gross amount of the donation (the net amount of the gift plus basic rate tax reclaimed by the charity). This has a big advantage for those whose taxable income is in the range £100,000 to £112,950 because in this range your personal allowance is progressively withdrawn, so there is an effective tax rate of 60%. Giving to charity and thereby increasing your basic rate allowance means that less of your income (or possibly none) will fall into that band.

There is a similar effect for those with taxable income over £150,000 and subject to the top rate of 50% income tax. Reducing the taxable income to below that level is worthwhile.

Here’s a useful fact: Gifts to charity are free of Capital Gains Tax (CGT). What that means is that any capital gain you have in an asset (such as shares) which would cost you 18% or 28% CGT if you were to sell it can be avoided completely if you donate the asset to a registered charity.

And here’s another useful fact: Gifts to charity are free of Inheritance Tax (IHT). Whether you make the gift in your will, or whether it is before your death the value would not be added back into your estate in order to calculate IHT. (It would be in most circumstances if you made the gift to a non-charity within 7 years of your death.) The gift to charity also leaves the annual IHT gift allowance of £3,000 unaffected and available for other gifts.

And the third in the trio of our most common taxes is of course Income Tax. The good news here is that (quite apart from Gift Aid and Payroll Giving covered in a previous article) certain gifts to charity can get you Income Tax relief. They include shares, land, or buildings. In effect, you can deduct the value of the gift from your taxable income.

Companies which make gifts to charity can also save tax. The gift is made gross (before deduction of Corporation Tax), and the value may be deducted from profits when calculating the Corporation Tax liability.

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