Tax efficient giving

4 December 2018

When making gifts to charity during your lifetime, or through your Will, the motivation is unlikely to include tax planning! But there can be ways to save tax as well as benefiting the good cause.

Gift Aid

Many of you will be asked when making donations to charity to tick the ‘Gift Aid’ box. But what does this mean? By completing this box, provided you pay tax at the Basic Rate, the charity is able to reclaim an additional 25% of your donation from HMRC. Additional money for the charity with no extra work for you.

For higher rate and additional rate taxpayers (40% & 45%) it is also possible to claim a reduction in your personal tax bill.

For example, a donation of £800 would be topped up to £1,000 for the charity under the scheme and would allow a reduction of personal tax as follows;

  • 40% taxpayer = £200
  • 45% taxpayer = £250

One planning point to consider at this time of year is the ability to claim relief in the last tax year ended 5th April 2018 in respect of a donation made after that date provided it is made before your Self-Assessment Tax Return is filed. This gives scope to adjust the tax payable on 31st January 2019 as well as benefiting your favourite charity.

10% reduction in Inheritance Tax (IHT)

If you leave at least 10% of your net estate to a recognised charity this may reduce the amount of Inheritance Tax paid by your estate to 36% instead of 40%.

The following notes explain some of the factors that need to be taken into account.

  1. The net value of your estate is the value of your taxable assets less qualifying debts, exemptions, nil-rate band and any other reliefs or liabilities.
  2. A qualifying charity is one recognised by HMRC that has been granted a charity reference number.

If by chance your IHT planning does not qualify your estate for the 10% rate reduction, your beneficiaries can arrange an instrument of variation to increase charitable donation to an appropriate level.

Needless to say the rules are complicated in all but the simplest circumstances so do talk to us if you want to introduce this feature into your estate planning.

  • For further information please contact:

    Nicola Allen

    Private Client Tax Manager, Tax, Yeovil

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