The covid-19 pandemic has made it clear how vulnerable certain groups are and the enforced isolation may cause clients to consider their position relative to others in society.
This may lead some to want to donate Donor Advised Funds to charity and this can be done in different ways, writes Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher.
Put a bow on the gift
Cash donations are simplest. This is also a tax efficient way of donating for UK taxpayers.
While simple from the client’s perspective, the tax analysis is a little more complicated.
The client actually only pays over 80% of the donation the charity receives but they also make a Gift Aid declaration.
The declaration can be made at the same time as the donation or up to four years afterwards.
For regular donations it may even have been made previously.
This declaration allows the charity to recover the basic rate tax that has been paid by the client on that income.
The tax recovered by the charity is 25% of the cash paid over by the client.
This is in effect a diversion of the tax paid by the client from the Treasury to the charity.
It is therefore vital that the client pays enough income tax and/or capital gains tax (CGT) to meet the charity’s claim.
Added bonus
The tax relief doesn’t end there for higher and additional rate taxpayers.
If the Gift Aid form is signed before that year’s tax return is filed, the client can recover the higher of additional rate tax on the donated income as well, reducing the effective cost.
So, a higher rate taxpayer donating £80 actually passes £100 ($123, €114) to the charity at a cost of £60 to themselves compared with simply retaining the money themselves.
This extra relief needs to be claimed by the client; if they are not completing a tax return they may be missing out on substantial tax relief.
There are also some less well known advantages.
Certain thresholds use “adjusted income”, so claiming Gift Aid donations can help prevent the loss of child benefit for incomes between £50,000 and £60,000 or the personal allowance where income is in the 60% zone between £100,000 and £125,000.
Claims may not be sufficient to prevent the loss of all of the benefits but for some clients there may be multiple benefits to making the claims.
With financial uncertainty, optimising tax relief may be a concern to some.
It is possible to treat charitable donations made in one tax year as having been paid in the previous year.
So, if 2020/21 is looking precarious, consideration needs to be given to pushing those donations back into 2019/20 as the tax return is completed.
Not just money
Cash is not the only way of donating to charity.
Gifts of land and quoted stocks and shares also attract tax relief.
These are treated differently and the value of the gift is simply deducted from the client’s income for the year.
The gift doesn’t lead to any CGT for the donor, but neither does it yield an allowable loss.
There is no tax recovery for the charity and it will need to decide whether to retain or liquidate the asset donated.
As charities are not generally subject to CGT, they will keep all the proceeds for charitable purposes.
These are not the only assets that can be donated.
Many charity shops operate what is effectively an agency system.
They will sell household goods for the client, who donates the cash proceeds to the charity- bringing us back to the cash gifts we started with.
This isn’t compulsory and clients can simply donate goods to the shop, but they and the charity may be missing out if they do.
Not so fast…
But there are a couple of caveats.
Firstly, the client cannot receive any benefits as a result of the donation.
This is normally more relevant to charity dinners, auctions and other events, but applies equally to things being bought online, such as lotteries and auctions.
Secondly, there may be some causes that appear worthy but don’t qualify as charities.
Some of these may be genuine good causes but others may be trying to take advantage of recent events.
The media has unfortunately revealed the selfish side to some people.
Some apparent good causes may use ‘charity’ websites without actually being charities and without any checks on how donated funds are used.
Clients may want to check the Charity Commission website, which registers and regulates UK charities.
That way clients can be confident that their donations will qualify for tax relief and not only be thankfully received, but also faithfully applied.
As ever, accurate record keeping is vital as any claims need to be accurate and timely, especially where the Gift Aid rules provide benefits beyond the obvious tax relief.
This article was written for International Adviser by Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher.
