Help from the taxman

Help from the taxman

Charitable donations shouldn't be a gift to the Revenue.

There are several ways in which the tax system provides incentivesouche. for donations to charity. This is a practical reminder of how to give effectively and thus help charities increase their funding.

Deeds of covenant.

A charitable deed of covenant is a legal document by which a person commits to pay a fixed amount of money every year (or more often) to a charity for a period of more than three years. Where the document is properly drawn up, full tax relief is given to both individuals and companies.

Charities can also reclaim the basic rate tax withheld by the donor. So, for instance, #100 in the hands of a charity costs a higher-rate taxpayer #60 and a company paying the full rate of corporation tax #69 – raising the cost by two-thirds and 45% respectively.

While legal advice should always be considered when drawing up a deed of covenant, there is a helpful Inland Revenue press release of 20 March 1990 which can be sufficient in straightforward cases.

Gift aid

Full tax relief is also available for individuals and companies that make donations of more than #250 net. Detailed conditions have to be adhered to, the principal one being the completion by the donor of Inland Revenue forms R190(SD) and R240(SD). The Inland Revenue’s booklet IR113 gives more details about this relief. As with deeds of covenant, the charity can reclaim the income tax withheld.

Charities Aid Foundation

The Charities Aid Foundation (CAF), itself a charity, is an umbrella organisation which facilitates donations to charity. For a fee of 5% of the gross contribution, a chequebook is received so that cheques for gross amounts can be written out direct to charities. This can be simpler than repeated use of gift aid, or paying small sums to a variety of charities under covenants, and so is a good way of immediately responding to appeals for donations.

Gifts to local charities

There is no general relief for charitable donations by traders. They are often disallowed under the well-known gifts and entertaining category.

By concession, reasonably small gifts to local charities are allowable.

Extra Statutory Concession B7 gives some further detail about this relief, and the Inland Revenue’s published interpretation RI 144 sets out some of its thoughts about charitable gifts by traders.

Similarly, gifts of plant and machinery, or of a company’s products, to local schools or other educational bodies can be deductible; for instance, donating old computer and other office equipment.

Give as you earn (GAYE)

Businesses can set up payroll arrangements whereby deductions are made from pay and remitted direct to charity by the employer, with the employees getting tax relief on their contributions. Take-up since GAYE was introduced in 1986 seems to have been poor. But I suggest that businesses should consider it for their staff, who can pay up to #1,200 a year this way.

Capital tax reliefs

Both capital gains tax (CGT) and inheritance tax (IHT) offer relief for charitable donations. Gifts of assets to charities are normally exempt from CGT, while bequests and lifetime gifts are exempt from IHT. As always, there are points to watch, and potential planning issues.

For instance, if an individual decides to sell some quoted shares and donate the proceeds to charity, he might be better advised to gift the shares themselves: by doing so, he can avoid any CGT liability, thereby giving the charity a higher net sum.

All in all, the tax system is relatively generous in the way it helps people contribute to charity so long as they do it in a structured way.

But it will be interesting to hear the results of the government’s review of the taxation of the charities themselves following representations to be made by December.

The CAF can be contacted on 01732 520050, or reached at Kings Hill, West Malling, Kent ME19 4TA

DONATIONS FROM BEYOND THE GRAVE

There are many ways of giving to charity but a bequest is one of the more tax-effective and painless routes. Some organisations derive the bulk of their revenue this way – in 1995, it was 72% for the Donkey Sanctuary and 57% for the Battersea Dogs Home. But they are the exceptions. In 1996 the voluntary sector overall pulled in a meagre 6% of its total income from legacies, according to Caritas Data.

Make a Will Week starts on Monday. The Law Society organises it every year to remind us to decide how we’d like our money spent when it is too late to spend it ourselves. So if you need help working out how to make a donation from beyond the grave, now is the time to ask.

The good news is that the charity pays no tax on the donation and the amount is deductable from the value of the estate before tax, easing the burden on your other beneficiaries. Inheritance tax can be completely avoided if, after the donation, the remainder of the estate is worth #215,000 or less. To get this break, the chosen organisation must be registered with the Charity Commission.

People with large estates often leave their shares or real estate to charities rather than to their family: not only does it reduce the value of the estate, and thereby the inheritance tax, but it also eliminates the capital gains tax liability. In the case of a family business, the relative who is going to take over then buys the shares back from the charity with their money legacy. The difficulty here is that this agreement cannot be included as a clause in the will.

Barrie Abrahams, head of charities at Levy Gee, cautions: ‘To ensure your money gets to where you intended, it is important to update your will every year because a lot of charities are merging and different organisations with like names are springing up.’ Alternatively, a trustee can be appointed to ensure your wishes are honoured even if a charity’s continued existence is uncertain or if you have a cause rather than a particular charity in mind.

The Charities Aid Foundation can act as an intermediary through its Legacy Account service. You set up an account, write CAF into your will and it distributes the funds to the chosen charity after your death.

Sinead Carew.

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