The tax benefits of charitable giving

Authored by: Joe Crome, CAP®, Head of Business Development and CAF American Donor Fund, Charities Aid Foundation (CAF)

More than one in five financial advisers do not know how to offer wealthy clients support on philanthropy despite its overwhelming potential and the tax benefits and implications associated with charitable giving.

New research by the Charities Aid Foundation (CAF) has found that just 5% of independent financial advisers (IFAs), wealth managers and planners are “very confident” about advising clients on philanthropy and half of all surveyed said the lack of confidence was due to an absence of training in the profession. A significant majority (73%) said they wanted more knowledge on helping their clients to give tax effectively.

We know that there is increasing demand from high-net-worth (HNW) clients for philanthropy advice, especially among younger generations.

A separate CAF survey found more than half (57%) of 18–34-year-old HNWIs and 49% of 35–54-year-old HNWIs believe an adviser could help with their philanthropy. However, it is not common for advisers to raise charitable giving with them - only a quarter (26%) say they have in the past.

Tax incentives for charitable giving have long played a crucial role to encourage individuals and businesses to support charitable causes and in doing so, they also ensure more money goes to charities. It should therefore be an imperative that clients are receiving this advice from professional advisers, consulting with specialist tax advisers where relevant.

The tax implications of giving money to charity may be the most practical reason for advisers to discuss philanthropy with clients, but there are also additional business benefits. Those who regularly give philanthropy advice found it helped to build on existing relationships with clients. Around 56% of advisers saw it as an opportunity to get to know their clients better, and nearly half said it makes them feel closer to their clients. Furthermore, a fifth (21%) drew a direct link between providing philanthropic advice and winning new business.

With advisers considering how to engage with the next generation and grow their business against the backdrop of the ‘Great Wealth Transfer’, philanthropy could prove to be a key point of difference in a competitive market. The next generation are expected to be the most significant donors in history, and how they approach their giving is expected to differentiate them from previous generations. As philanthropy advisers, we know it is essential to understand the motivations, values, and attitudes of clients, as well as the mechanisms available to them, to ensure philanthropy is as effective as it can be. 

Tax Guide to Giving Gift Aid

Gift Aid is a scheme available to UK charities and Community Amateur Sports Clubs (CASCs) which means they can claim back income tax from HMRC on a taxpayer’s donation; effectively an extra 25% for basic rate taxpayers. Each time an eligible taxpayer donates but forgets to tick the Gift Aid box, the charity misses out – collectively to the tune of £500 million each year. A charity can claim Gift Aid when a taxpayer makes a monetary donation from their own funds and have paid UK Income and / or Capital Gains Tax during that tax year and make a Gift Aid declaration. 

The amount of tax they pay needs to be at least equal to the value of Gift Aid the charity or CASC will claim on their donation(s).

Non-cash donations

In the UK you can donate cash, shares, or property to charity and all three have different tax implications. For example, donating shares might be most tax-effective for the client, but the charity won’t be able to claim the Gift Aid and could mean they receive less money. It’s important to consider a client’s personal circumstances and motivations before recommending which method is not only best for them, but also most practical for the charity.

Donor advised funds

Donor advised funds (DAFs) are the UK’s fastest-growing philanthropic giving vehicles. Acting as a one-stop shop for a HNWI’s giving needs, donors make charitable contributions and then recommend for the DAF to be invested or make grants to organisations that they suggest over time. DAFs, for which there are a number of providers including CAF, offer several advantages over setting up your own charitable foundation, namely cost savings, tax-efficiency, flexibility, and ease of administrative, fiduciary, and reporting requirements.

When a client gives a donation into a DAF, it crosses the charitable threshold. It is not a bank account and the client can’t withdraw money from it - it needs to be used for charitable purposes.

Gift Aid may be applicable on cash gifts to a DAF. In addition, clients who pay tax above the basic rate can reclaim the difference between the rate they pay and the basic rate of tax via their personal tax returns to unlock further benefits.

Legacy giving

Tax advantages can make a significant difference to the beneficiaries of an estate. A gift to a UK charity in a Will is free from Inheritance Tax, meaning that the money is ‘removed’ from the value of a donor’s estate before tax is calculated. In addition to the donation being tax free, charitable gifts can reduce the amount of tax paid on the rest of the estate. If 10% or more of the net estate is gifted to charity, then the rate of Inheritance Tax paid on the rest of the estate is reduced from 40% to 36%. 

Gifts in Wills can therefore make a significant difference to the causes that donors care about the most, whilst having a positive impact on the remainder of their estate.

Payroll Giving

Payroll giving is a highly tax efficient way of giving because donations are taken from pay or company/personal pension after National Insurance Contributions are removed, but before Income Tax is calculated and deducted. This means the donor gets tax relief, depending on the rate of tax they pay. So, for example, an employee’s donation of £20 through this scheme costs a basic rate taxpayer £16, a higher-rate taxpayer £12 and an additional rate taxpayer £11; less if they are a Scottish taxpayer. Because the employee’s tax contribution is then calculated on a lower amount, this could change their tax bracket and lower the amount of tax they ultimately pay.

Give As You Earn, the UK’s biggest payroll scheme, facilitates over £63 million of donations to charities each year, giving charities a regular income and reducing administration and fundraising costs. Donations made to charity through payroll giving aren’t eligible for Gift Aid because they’re taken from an employee’s wages before tax.

Dual UK and US taxpayers

Dual citizenship can complicate charitable giving and an adviser with knowledge of this area can be incredibly attractive to many HNWIs. Twenty years ago, CAF launched the American Donor Fund (CADF), a DAF specifically for dual UK and US taxpayers, enabling donors to claim eligible dual tax relief on their giving.

This article was first published in ThoughtLeaders4 Private Client Magazine, February 2024.