Christmas is the time for giving and, with this in mind, your clients may be considering donating money to one or more charities that are close to their heart.
As many of us gear up to enjoy the festivities with loved ones, it’s also an opportunity to reflect and help others during the season of goodwill.
What your clients may not realise though, is that giving to charities could make them more tax-efficient, making it a win/win for everyone. With this in mind, read on to discover three ways charitable donations could help reduce your client’s tax liability.
1. It could help reduce Inheritance Tax (IHT)
As IHT is typically charged at 40% and liable against all your worldly belongings, it has the potential to significantly reduce the amount of money your client leaves to beneficiaries. That said, your client will typically have a threshold amount of money they can have in their estate on death before it’s liable to IHT.
This threshold is known as the “nil-rate band” (NRB) and “residence nil-rate band” (RNRB), and in 2021/22, your client could have between £325,000 and £1 million, depending on their circumstances.
A financial planner could confirm how much your client can have in assets on death, and whether their estate could have an IHT liability.
While any amount above the threshold is usually liable to IHT, one way your client could reduce their liability could be to leave money to charity when they die. Because money that’s donated reduces the size of an estate, it could also reduce an IHT liability.
If your client donates enough money to bring their estate to below their NRB and RNRB threshold, they will typically negate any IHT liability. Alternatively, if your client leaves more than 10% of the estate that would be liable to IHT, the tax rate drops from 40% to 36%.
2. Giving could reduce Income Tax
If your client is a higher-or additional-rate taxpayer and donates to a charity, they could benefit if they use Gift Aid. The scheme allows UK registered charities or community amateur sports clubs (CASCs) to claim the basic-rate tax paid on the money donated, as long as the donor is a UK taxpayer.
This means the charity or CASC receives a 20% uplift from the government on the money your client gives them. For example, if your client donates £1,000 via Gift Aid, a charity will receive £1,250 after tax relief is added.
In addition, higher- and additional-rate taxpayers can claim the difference between the rate they pay and the basic rate on their donation. Clients would normally claim this additional relief through their self-assessment.
Donations could help restore lost Personal Allowance
If your client earns more than £100,000, they will typically start to lose their Personal Allowance. The allowance is the amount the government allows most people to earn before Income Tax is due. In 2021/22, it is £12,570.
After £100,000 the allowance reduces by £1 for every £2 your client earns, meaning they will not have any allowance if they earn more than £125,140. In other words, they pay Income Tax on all their earnings.
The good news is that Gift Aid extends the £100,000 threshold by £1 for every £2 donation, helping your client potentially recover some – or all – of their allowance.
3. Donating may provide Capital Gains Tax (CGT) relief
If your client makes a profit on an asset and then sells it, they are typically going to be liable to CGT. That said, there are exceptions to this rule, such as your main home, and in the 2021/22 tax year the government allows £12,300 to be made in profit before the tax is due.
Depending on the type of asset sold and your client’s earnings, CGT will typically be charged at between 10% and 28%. If your client donates the asset to charity, they will typically not be liable to CGT on any profit made. This applies to assets including land, property or shares.
Get in touch
As you can see, making charitable gifts could help your client be more tax-efficient. If you have a client who is considering a donation as part of a will you’re writing for them, or is a higher-earner who regularly donates to good causes, we could help ensure they are as tax-efficient as possible.
Just contact us at hello@ardentuk.com or 01904 655 330 – we’d be happy to talk.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Please note, this article only deals with England and our understanding of English Law.
