If you're feeling charitable you can pay less tax.
The economy is hitting us all hard. With unemployment at record levels, and (arguably) no real sign of any green shoots, those relying on the generosity of others, like charities and community clubs are also falling on hard times.
However, from a tax perspective, giving to charity is one of the most effective ways of ensuring the taxman does not get his grubby mitts on your cash. Admittedly, you do actually have to give something to charity rather than keeping it in your own pocket, but knowing the altruistic and kind-hearted nature of Fooldom, I felt it was worth highlighting this excellent way of tricking the taxman into generously helping the unfortunate. The really unfortunate, rather than just the general population who have to complete a tax return, that is.
What you may already know about Gift Aid
Most people will realise that by signing a declaration when giving cash to UK registered charities, the charity is able to reclaim an amount equivalent to the basic rate tax paid on that cash from HM Revenue and Customs (HMRC) in addition to your donation. If you are fortunate enough to be a higher rate taxpayer, you are able to claim an additional deduction in your income tax computation for that higher rate tax suffered.
For example, Jen Urrus is a basic rate taxpayer and donates £1,000 to charity. As she has already paid income tax on her earnings, the basic rate of tax on her donation has already been covered by her tax payments and the charity claims back the basic rate tax of 20 per cent (calculated as 20/80) from HMRC. The charity is able to make a repayment claim of £250 and HMRC will add an additional transitional relief of £30, to compensate for the reduction in the basic rate of tax from 22% to 20%, making a total payment of £280.
If she was a higher rate taxpayer, Jen could claim the difference between the higher rate of tax at 40 per cent and the basic rate of tax at 20 per cent on the total value of her donation, so she can claim 20 per cent of £1,250, a total of £250. As a result the charity has received £1,280, but Jen has only paid £750 (£1,000 gift less £250 tax relief), meaning HMRC has coughed up the remaining £530. Nice trick.
Shares and gifts to charity
Now, giving cash to a charity is great if you have deep pockets full of the stuff, but what if all your wealth is tied up in shares? The good news is that you can now give shares to charity and benefit from income tax and capital gains tax (CGT) relief. Yes, really.
Ordinarily, when shares are disposed of a capital gain is calculated on, broadly, the difference between the price paid for the shares, and the price received for them on a sale. If the shares are disposed of by way of gift, or certain other transactions to connected parties, market value is substituted for the actual proceeds received, if any. In the absence of any provisions to the contrary, the gift of shares to a charity could mean a CGT liability arising even though there is no cash to pay the tax bill.
However, provided the shares are transferred into the charity's name, or that of a qualifying community amateur sports club (CASC), the transaction will be treated as giving rise to no gain/no loss for CGT purposes. Similarly, if the shares are instead sold to a charity or CASC at undervalue, that lower value is used when calculating any gain arising.
Note that the transaction will be deemed no gain/no loss, so that shares currently standing at a lower value than they were bought for, probably a depressingly large number of holdings at the moment, will not generate a capital loss that can be used against current or future gains unless no claim is made on the relevant Self-Assessment tax return. If a claim is not made, then no income tax relief will be due either, which all seems rather convenient for HMRC.
Income tax relief on gifts of shares
Lovely and welcome though relief from CGT is, at a maximum of 18%, the benefit can be far outweighed in income tax relief.
In simple terms, you may deduct the total market value of any shares gifted to charity, plus any costs of disposal (like legal fees) from your income chargeable to tax. This means that relief at up to 40% of the market value is available, and this will become 50% before long. Similarly, for sales at undervalue, the market value less any proceeds forms the basis of the deductible amount. In both cases, the deduction is restricted if you have received any benefit from the charity in return for the donation of shares. Unfortunately, this relief only applies to UK registered charities and not to CASCs.
It is important to note that the income tax relief can only be claimed in the year of the gift and cannot be carried forwards or backwards. It is therefore crucial to time gifts so that you have income of at least the amount of the available deduction, or better still, income of that amount taxable at 40% (or 50%) in order to derive maximum benefit.
Going back to Jen, if she gifts her holding of a million shares in UK BankCorp, worth about £50,000 to charity, the charity can immediately sell the shares for £50,000. Although Jen doesn't have the £50,000 in her pocket, she would have had to pay CGT of £5,400 (assuming a base cost of £20,000) and she will get higher rate income tax relief of £20,000, meaning the taxman has effectively paid more than half the value of her charitable donation. Which is a very good trick indeed.
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