The first is that, in order for the charity to claim a refund of the tax deemed to have been deducted before giving the money to the charity, the donor doesn’t any longer need to match the gross amount with income taxed at the basic rate.
This rule caused a potential problem for deeds of covenant entered into by people on lower incomes – who are often the most generous members of the community. In theory, at least, the excess of the basic rate tax deducted from the covenant over the basic rate tax suffered by the donor (if any) could be reclaimed from them by the Revenue.
Now, gift aid is much more convenient because one-off payments can be made, however small (previously they had to come to at least £250). Also, the tax deducted from the payment needs only to be covered by the total tax suffered on the donor’s income. In other words, it’s tax against tax rather than gross against gross. These two changes between them now enable more people on lower incomes to make use of gift aid.
For instance, if Edith gives £20 to a charity under gift aid, this represents a gross payment of £25.64 less tax of £5.64. Previously, if it was a covenanted payment (as it was too small for gift aid), she would have needed £26 of income taxed at the basic rate or higher, on top of £1,500 taxed at the 10% starting rate. Now she needs only have suffered tax of £6, which could simply come from £60 taxed at the starting rate. (She couldn’t use the same slice of tax, of course, to frank the tax on more than one gift aid payment.)
Charities can now tap into a new sector of the giving population: people who are on low incomes, but not so low that they don’t pay a modicum of tax. It could help charities’ fund-raising efforts enormously.
At the other end of the spectrum is the extraordinarily generous relief granted when the subject matter of the gift is not cash but listed shares or securities. This is set out in clause 43 of this year’s Finance Bill, which has now been accepted by Parliament in Standing Committee.
Again, an example will help. Suppose Brian, who is comfortably into the top tax bracket, subscribed a small sum of money for shares in an IT company some time back, the shares became listed and the company is now subject to a takeover bid. This makes the shares worth £20,000, which Brian regards as a windfall that he doesn’t deserve or need, whereas his favourite charity does. If he accepted the bid and paid capital gains tax of something like £8,000, he could give the charity the remaining £12,000 and claim further tax relief of £2,769 (ie £12,000 grossed up at 22% to £15,385, times 40% higher rate less 22% basic rate). Brian would get £2,769 out of it, therefore, and the charity would get shares that it could sell for £20,000.
Prior to April 2000, Brian could instead have given the shares to the charity and would have been relieved of the £8,000 capital gains tax liability. He couldn’t have claimed gift aid relief, however, as only gifts of cash qualified. What transforms the situation from April 2000 is that if he gifts the shares to the charity, not only will he avoid the CGT liability as before, but he can also get income tax relief on the value of the shares as an extension to gift aid. What is even more remarkable is that the value of the shares does not have to be grossed up at the basic rate. Instead, Brian gets a tax repayment on the value of the shares at the full 40% rate, making £8,000. The charity ends up in the same position as before, but Brian gets back from the Revenue not £2,769 but £8,000.
Happy bunnies all round. I would say.
Maurice Parry-Wingfield is tax director at Deloitte & ToucheT
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