Chapter: 2 - Inheritance Tax Mitigation: The Basics

Income Tax and Capital Gains Tax

2.9.2

A payment to a charity, which may be one-off or regular, can attract two forms of tax relief under the Gift Aid regime (FA 1990 s25).  First, a payment to the charity of an amount under deduction of Income Tax at the basic rate enables the charity to recover that basic rate tax from HMRC.  So, with a basic rate of 20%, a payment of £80 is treated as a gross payment of £100 on which the charity can recover £20.  This assumes that the donor has paid sufficient Income Tax or CGT to cover the tax recovery: if not, there will be an unexpected tax liability on the donor (under FA 1990 s25(8)).  Second, to the extent that the donor is a higher rate taxpayer, he can recover higher rate tax relief on the amount of the gift, that is, £20 on the above figure.  So the cost of putting £100 into the hands of the charity is just £60. 

TAX TRAP: It’s an obvious point, but a potentially expensive one to get wrong: ensure that the donor has paid sufficient Income Tax and/or CGT in the year of the donation to support the tax reclaim by the charity.  If not, the charity gets the tax back and the donor gets a tax bill.

Separately, there is also a relief for gifts of shares and securities and of land situated in the UK to charity (ITA 2007 ss431-446).  And any gain arising on the gift does not attract CGT (TCGA 1992 s257).  The charity is treated as inheriting the donor’s base cost.  And so any gain realised by the charity on sale will not attract tax, assuming of course that the proceeds are applied for charitable purposes.