Taxes on Charity and Donations Through Gifts, Pensions, Wages, Properties and Shares

What is a Donation?

A donation is a gift given by physical or legal persons, mainly for charitable reasons and/or to benefit a cause and it could be done in various ways and forms, such as cash offering, services, new or used goods including clothing toys, food and vehicles. Donations may also include emergency, relief or humanitarian aid items, development aid support, and can also relate to medical care needs such as blood or organs for transplant. In case, donation is of charitable nature, it is also known as gifts in kind. From legal point of view donations are given without return consideration and only when it is actually made, it acquires legal status as a transfer or property. In other words, it is done voluntarily in form of cash, tangible items and property from one person, also called as donor to another person, or institute in case of charitable organization.

For a donation to be legally effective, it should meet three basic criteria such as intent of the person who is giving the donation, physical handover of the donation to the concerned person and its acceptance by the concerned person who is receiving the donation. It is also possible to make the donations in the name of a third party or in the honor or memory of someone or something, which includes holiday gifts, wedding gifts, in memory of someone who has dies, in memory of pets or in the name of groups or associations which are no longer functional.

Donations, by the name of it, sounds as a tax-free activity, however this is not the case always. Certain donations might fall under tax-free category whereas certain donations might attract tax. So, you need to be careful with certain parameters before you go ahead with the donation.

Tax Relief When You Donate to a Charity:

In case you are donating to a charity or to community amateur sports clubs, you don’t have to pay any tax on it . This is called tax relief. The applicable tax will go either to you or to the charity and it will mainly depend on whether you donate:

Through Gift-Aid: In case you are donating through Gift-Aid, charities and community amateur sports clubs can claim an extra 25p on every £1 you have donated. Gift-Aid allows you to complete a simple, short declaration stating that you are a UK taxpayer and any cash donations which you make to the charity after making a declaration will be treated as being made after deduction of income tax at the basic tax rate, and the concerned charity can reclaim the basic rate income tax paid on the gift from Her Majesty’s Revenue & Customs (HMRC). However, you need to remember that Gift-Aid is only for donations by the donor and thus it cannot be claimed on other people’s donations, i.e. each and every person, who is contributing towards the donation, has to make a Gft-Aid declaration for their portion. In case you are a UK taxpayer who pays tax at the higher or the additional rate, you can claim the difference between the rate you pay and basic rate applicable on your donation. It can be done either through your Self-Assessment tax return or by requesting HMRC to amend your tax code.

For example: If you have paid £100 to a charity, they can claim to Gift-Aid to make your donation £125 and since you pay tax at 40%, you can personally claim back £125 * 20% = £25.00.

Directly from your wages or pensions through a Payroll Giving Scheme: In case you are giving donations directly from your wages or pensions , the tax relief which you get on it will depend on the rate of tax you pay and to donate £1, you pay:

• 80p, in case you are a lower rate taxpayer.
• 60p, in case you are a higher rate taxpayer.
• 55p, in case you are an additional rate taxpayer.

However, to donate directly from your wages or pensions, you need to check with your employer or pension provider if they run a Payroll Giving Scheme, which is a way of giving or donating money to charity without paying any tax on it.

From your land, property or shares: In case you are donating your land, property or shares to a charity, you will get a tax relief on the same, i.e. you don’t have to pay tax on it and you get tax relief on both income tax and capital gains tax . This is applicable even if you are selling your land, property or shares to a charity at a cost lesser than its current market value. However, it becomes very important for you to keep all the records safe with you regarding your donation in order to show that you have made the donation to the charity and it has accepted it as well. In absence of the same, your donation will not be legally valid. In order to get income tax relief on the same, you pay less income tax by deducting the net value of your donation from your gross taxable income for the tax year, i.e. from 6th April to 5th April. You can claim the income tax relief on your donation by filling up the Charitable Giving” section of your Self-Assessment Form. There is no capital gains tax involved in it unless you have sold your land, property or shares for more than you have bought them for but less than their current market value.

Through will declaration: You can donate my making a declaration about the same in your will as well, which states what will happen to your money, property and possessions after you die. Through your will, you can donate a fixed amount, an item or what is left after other gifts have been given out. However, your will should clearly says whom you want to donate and what you to donate to avoid any dispute amongst the concerned parties and in case of a donation made in a will declaration, it will either be taken off the value of your estate before Inheritance tax is calculated on it or rate of Inheritance tax is reduced, in case more than 10% of your estate is left for the charity.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.