Finding a tax smart approach to maximise your charitable impact

In addition to the public benefit that comes with it, charitable giving can be a strategic element of personal tax planning. Understanding the intricacies of UK tax rules is, however, crucial for individuals seeking to enhance their charitable impact whilst minimising their personal tax exposure or that of their estate.

Key UK tax efficiencies

The UK offers some important tax breaks for charitable giving. Of these, three are considered particularly valuable. First, elimination of capital gains tax ('CGT') (gains realised on gifts to charities being, broadly, CGT exempt). Second, reduction of income tax (this may be delivered by way of gift aid or payroll giving in respect of cash donations or via the reliefs available for gifts of 'qualifying investments' or land). Third, a reduction in inheritance tax ('IHT') (gifts to charity are IHT exempt and a lower rate of IHT, 36% instead of 40%, is available to testators who leave 10% or more of their net estate to charity).

Your charitable action plan

While the decision to give can be a simple one, deciding how to implement this in practice can be difficult. It is important to consider (i) what you want to accomplish with your charitable giving, (ii) what types of assets are suitable for donation given your personal position and tax profile, (iii) what are the tax and financial implications of your donation, both in the UK and abroad, (iv) whether income tax or CGT relief should be prioritised and (v) when is the optimal time to take action.

Lifetime planning should be done on a case-by-case basis to identify whether it is most efficient for you to gift the asset directly to the charity, or first sell the asset and then gift the proceeds. This is because gift aid relief and relief for gifts of assets to charity operate differently. Where assets are standing at a loss, you may want to consider 'harvesting' the loss by selling the asset before gifting the proceeds to charity so as to prevent the loss from being eliminated. Should you have appreciated investments that have exceeded the target allocation, it may be possible to combine charitable giving with investment portfolio rebalancing.  

Cross-border issues also need to be considered carefully. Taxpayers need to be mindful that the definition of qualifying charities for UK tax purposes was restricted with effect from 15 March 2023. Each jurisdiction has its own tax relief regime and particular care is needed should you be exposed to tax in more than one country. Donations to US-based charities, for example, are unlikely to qualify for tax relief in the UK unless they have been established on a 'dual-qualified' basis. Where this is not an option, you may need to consider alternatives, such as utilising a dual-qualified donor advised fund ('DAF').

Fuelling charitable giving with non-cash or 'problem' assets

Non-cash gifts during lifetime may offer a tax efficient opportunity to further the charitable aims of a number of taxpayers and address issues otherwise arising in relation to 'problem' assets such as illiquid assets which have appreciated substantially or assets where there is a mismatch in the tax treatment in the UK and abroad (LLC interests being a prime example). Carefully planned charitable donations may kill two birds with one stone – maximising your charitable impact whilst simplifying your tax profile going forward.  Donors making gifts of business interests do, however, need to ensure that they do not fall foul of rules regarding qualifying investments or the tainted donations rules, which disapply the usual tax reliefs if donors obtain a financial benefit for themselves from making a donation to charity.

Before accepting any privately held assets, charities will need to examine whether the assets earmarked for donation fall within their gift acceptance policies and confirm a path to liquidity. A review is likely to be required of transfer restrictions and any contingent liabilities (amongst other things). DAFs may serve as useful vehicles to receive assets with some potential liquidity in the near future and then distribute the sale proceeds to a group of charities recommended by the donors, thereby simplifying the donation process for both donors and charities.

Continuing your charitable endeavours after death

Your charitable legacy can continue long after your passing with appropriate estate planning.

A testator can make gifts to charities in several ways. You may wish to consider charitable provision by including specific legacies in your Will, providing for specified charities to take a share of your residuary estate or including charities as potential beneficiaries of a discretionary trust (assuming the trustees exercise their discretionary powers within 2 years of your death in favour of a named charity). Alternatively, you may wish to consider establishing a charitable vehicle within the Will itself.  

Implementing planning to secure the reduced rate of IHT can be highly effective from a tax perspective, whether via the drafting of the original Will or a post-death variation. A variation is particularly attractive where the original gift to charity represents c.5-9% of the net estate. In these circumstances, increasing the charitable gift to 10% will, in fact, increase the receipts in the hands of your non-charitable beneficiaries.

Navigating choppy waters

Charitable giving can be an important tax planning tool. But it's not always plain sailing. Restrictions do apply and it will be important to instruct a tax advisor to help you navigate the choppy waters. Withers can advise you on the nuances of charitable giving in a variety of jurisdictions and help you identify a tax smart approach to maximise your charitable impact both during lifetime and after death.