Charity begins with tax benefits

Jeremy Passmore, a partner in the private client department at Thomson Snell & Passmore, discusses how charitable giving is on the increase as the Government squeezes tax rates for higher-rate taxpayers

When individuals think about making a gift to charity, supporting good work in particular fields of charitable activity is normally the predominant motive. Nonetheless, the fact that gifts attract very generous tax treatment is an added attraction and a boost to individuals’ philanthropic instincts.

Basic-rate taxpayers

In respect of basic rate taxpayers, charities benefit under Gift Aid by recovering the basic rate paid, so a taxpayer gives £800 net income, and the charity receives a total of £1,000.

40% rate taxpayers

The benefit for higher-rate taxpayers is greater. Until this tax year, if a higher-rate taxpayer earned £1,000 income, after tax he was left with £600. If instead he gave £800 to charity, the charity could reclaim the basic rate already paid and ended up with £1,000. The tax relief removed the higher-rate tax liability; although the taxpayer does not directly benefit, the net sum of £600 he would have had left is turned into £1,000 in the hands of the charity.

50% rate taxpayers

Under the new rates of tax that apply to those earning over £150,000, that same
calculation means that the taxpayer’s £500 net amount is turned into £1,000 in the hands of a charity.

So, for top-rate taxpayers, the new rates of tax make the tax benefit that much greater. One perhaps unexpected effect of the increases in rates of income and capital gains tax is a boost to charitable giving by wealthier individuals. It seems that the Government’s squeeze on tax rates is encouraging more individuals to give more to charity.

For those smarting at the injustice of such a high rate there seems to be an attraction of looking to ways to beat it. For some individuals it is almost as though their dislike of paying tax at penal rates means that they would prefer to forego that £500 net figure for the pleasure of avoiding paying the Government so much. And if that can be done helping good work by charities, then the feel-good factor from that and the satisfaction of beating the system proves quite a powerful combination. Professional advisers are at present reporting seeing many people motivated in this way.

Earning between £100,000 and £150,000

As well as higher rate taxpayers, those earning between £100,000 and £150,000 have a higher marginal rate on their top slice of income, because of the withdrawal of the personal allowance. This can be as much as 60% and the tax attractions for them are even greater.

Non-domiciles

It has also been noticed that there is something of a trend among non-domiciled individuals to increase their charitable giving, perhaps even to the extent of wiping out their UK income tax liability entirely.

Capital Gains Tax

The rise in the capital gains tax rate to 28% for higher-rate payers is a further incentive for giving, with assets such as shares capable of benefiting from relief, any gain on the disposal being eliminated.

Inheritance Tax

Of course, gifts to charities have always benefited from relief from Inheritance Tax and this remains a strong incentive, particularly to those affronted by a tax payable on death on assets that have almost certainly already suffered income and capital gains tax during lifetime. Again, there is no strict financial logic, as you are turning a net receipt worth £600 to an individual into an actual receipt by the charity of £1,000, but for many that £400 not going to the Government is appealing, and adds to and prompts the philanthropic motive.

Billionaires

We read in the news that if you are one of the world’s multi-billionaires, a Bill Gates or Warren Buffett, you might be planning to give half of your wealth to good works, and persuading your similarly wealthy friends to do likewise. Perhaps here the driver is not so much the tax treatment but genuinely philanthropic motives, and besides, there is a limit to how much wealth the families of such rich individuals need to inherit.

Charities have clearly suffered because of the recession, and many are looking to a tough future with a squeeze on public expenditure likely to affect many charities providing services to the public sector; but the accompanying increase in tax rates is at least prompting some additional giving by the well-off, which may alleviate some of the pain.