For charities and philanthropists, much of the Chancellor’s budget yesterday covered familiar ground; the budget revisits and confirms key changes announced in last year’s budget including a reduced rate of inheritance tax where substantial gifts are made to charity, Gift Aid in respect of small donations without the requirement for a Gift Aid declaration, and tax relief for gifts of pre-eminent objects to the nation. However, a potentially worrying announcement for charities and philanthropists is also lurking in this year’s budget 2012.
Confirmations and news for charities and philanthropists
The Government confirmed key announcements which were made in last year’s budget including:
- For deaths on or after 6 April 2012, the reduced rate of inheritance tax of 36 per cent will be available for estates which leave 10 per cent or more of the taxable estate to charity.
- From April this year the Government will withdraw Self Assessment Donate or ‘SA Donate’ for tax returns for 2011 – 12 onwards.
- Also from April tax relief will be available to donors who donate a pre-eminent object or artwork to the nation, subject to caps and limitations.
- From April 2013 charities will be able to make a Gift Aid repayment claim of up to £5,000 without Gift Aid declarations in respect of donations of up to £20 (an increase from the £10 announced in last year’s budget 2011).
- The existing legislation introduced by the Finance Act 2010 to put onto a statutory footing the practice of claiming Gift Aid repayments ‘in year’ will be amended to address certain issues with its drafting.
In addition, the budget set out the following items of interest to charities and philanthropists:
- The Government will work with the charity sector to simplify Gift Aid in the context of charity shops. The suggestion of a Gift Aid database has been advanced by sector groups such as the Charity Tax Group in order to achieve this, but it is not yet evident if this will be taken up.
- The Treasury will conduct an internal review looking into the financial barriers to social enterprise.
- A VAT exemption for cost-sharing arrangements will be introduced following the announcement in the Government’s Autumn Statement last year that services shared between VAT-exempt bodies, including charities and universities, will be exempt.
- From 1 October this year, the Government will withdraw charitable buildings from the scope of the VAT reduced rate for the supply and installation of energy-saving materials.
Capping tax reliefs
The budget contains another key item of importance to charities and philanthropists, however.
The Chancellor announced the introduction of a limit, from 6 April next year, on all income tax reliefs that are not currently capped. This would include in principle Gift Aid and Payroll Giving, relief for gifts of shares, securities and land to charities, and gifts of pre-eminent objects to the nation under the forthcoming scheme, as well as any uncapped non-charitable reliefs. Although the detail is not yet known, this cap will apply to those seeking to claim more than £50,000 in reliefs (across all reliefs) in which case the relief available will be limited to 25% of a person’s income.
The majority of donors who give a small percentage of their income to charity will not be affected. This proposal would, however, affect a donor wishing to make significant gifts to charity. HMRC has separately (i.e. not in the budget statement) clarified that an individual with an income of £1m will be able to claim up to £250,000 of tax reliefs which are uncapped, but the present Gift Aid relief – including both the charity’s basic rate reclaim and the donor’s additional rate reclaim – could enable more than £250,000 to be claimed by way of relief and is thus more favourable.
There is no detail in the budget concerning any possible ability to carry-forward portions of Gift Aid relief that would have been available under the existing regime. Similarly there is no indication that the Government will differentiate between the basic rate relief which is reclaimed by the charity and higher or additional rate relief which may be reclaimed by the donor. It remains to be seen how this proposal may affect the mechanics and administration of Gift Aid and Gift Aid declarations.
The relevant section of the budget statement indicates that the cap is proposed to ‘curtail’ the ‘excessive’ use of tax reliefs saying: _‘Tax reliefs exist for good reasons, to promote activities such as business investment and philanthropy. But it is unfair that reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates.’ _
Whilst more proportionate effective taxation of the wealthy is a hot political topic, changes which could disincentivise philanthropists from making large gifts and taking up government match funding challenges would seem to be directly at odds with the Government’s commitment to the Big Society and to fostering a culture of giving in the UK.
The budget statement does provide that the Government will ‘explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations’. Unless the apparently disincentivsing effect of this proposal is addressed, it is difficult to see how effective this exploration may be.
The effect on lifetime giving
The cap on reliefs is expressed to ‘introduce a limit on all uncapped income tax reliefs’. It is not yet clear how the cap may affect the application of Gift Aid relief for Capital Gains Tax purposes. However, donors may take the view that their gift can be more effective if it is made with full charitable relief on death rather than with only limited relief during their lifetime. Taken together with the reduced rate of inheritance tax for estates giving 10% or more away to charity, this proposal could lead some to prefer testamentary giving to lifetime giving. This is extremely unfortunate as charities facing funding crises in the here and now will be unlikely to welcome any measure which could have the effect of encouraging delay.
We also remain disappointed that a consultation on lifetime legacies was not announced in this Budget.
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