Donating to charity and what the tax benefits can be

Donating to charity is often the choice for individuals rather than leaving their wealth to their family. There are tax efficiencies in doing so.

 Donating to charity

Wealth often flies in unexpected directions

If you are making decisions on what to do with your wealth when you die or indeed what to do with it when you are alive, there are tax benefits on donating to charity. And it seems that quite a number of people are doing that rather than leaving it to family.

Research shows that if you’re banking on an inheritance from a relative you may be in for a disappointment. Similarly, if you fancy leaving your wealth to someone other than family you are not alone in your thinking. Apparently 28% of retirees say they won’t be leaving any money to relatives and yet 74% of children or grandchildren believe they will be getting something. Even if they do 67% of retirees say they will be leaving less than their relations are expecting. This research from retirement specialists Responsible Life.

Encouragingly perhaps (except for those who expected a legacy) among those not intending to leave anything to younger family members, 55% said they plan to spend everything they have before they die.

The reasons why people don’t want to leave their wealth to family are varied: 18% said they don’t get on with their children or grandchildren; 22% believe people need to make their own way in the world and not rely on inheritance.

When asked how much money those leaving money to children/grandchildren would set aside, the largest percentage (41%) will leave 25% of their money or assets, 34% will leave 50%, and 15% will leave 75%. Just 5% will leave everything and 5% will leave less than 10% to their younger family members.

In monetary terms, 30% of those asked will be leaving between £10,001 and £20,000, 23% between £20,001 and £50,000, 18% more than £100,000, 12% between £5,001 and £10,000, 3% between £1,000 and £5,000, and 2% were leaving less than £1,000.

Steve Wilkie, managing director of Responsible Life unsurprisingly those wanting to leave money behind are doing it through their property: “The economic climate today means getting a first house or having enough money to go to university is tougher than ever, but children or grandchildren holding out for a cash injection when an elderly relative dies could be in for a shock.

“But it’s still clear that most retirees want to help their family if they can. One way grandparents and parents can do this with early inheritance. This is one of the biggest growth areas in the lifetime mortgage market.”

Donating to charity

Those who said they weren’t planning on giving any money or assets to their children or grandchildren 69% said they leave it to a charity, 66% to close friends and 24% to a helpful neighbour. A local cat charity or home was chosen by 14%, and a local dog home or charity by 11%, while 7% said they’d leave something for their pets in their will.

You can of course save on inheritance tax (IHT) by giving to charity. HMRC advises that you may qualify to pay IHT at a reduced rate of 36% if you leave at least 10% of your net estate to charity. It provides a handy calculator for you to work out what you need to qualify.

You can also get tax breaks by leaving money to charities through:

  • Gift Aid;
  • Donating straight from your wages or pension;
  • Donating land, property or shares;
  • Leaving gifts in your will.

Gift Aid

By giving money to a charity using Gift Aid the charity can claim 25p on top of every £1 donated. You need to fill out a declaration form – one for each charity you donate to – and can your donations qualify as long as they are not more than four times what you have paid in tax that tax year.

You can offset against tax you pay as well if you are pay tax above the basic rate of tax. For example, if you donate £100 to charity – the charity claims Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).

Donating straight from your wages or pension

This is done through a Payroll Giving scheme run by your employer, company or personal pension provider. The donation is made be before tax is deducted from your income.

The tax relief you get depends on your tax rate.

To donate £1, you pay:

  • 80p if you’re a basic rate taxpayer
  • 60p if you’re a higher rate taxpayer
  • 55p if you’re an additional rate taxpayer

The tax relief you get is different in Scotland where to donate £1, you pay:

  • 81p if you’re a starter rate taxpayer
  • 80p if you’re a basic rate taxpayer
  • 79p if you’re an intermediate rate taxpayer
  • 59p if you’re a higher rate taxpayer
  • 54p if you’re a top rate taxpayer.

Donating land, property or shares

You do not have to pay tax on land, property or shares you donate to charity.

You can pay less Income Tax by deducting the value of your donation from your total taxable income for the tax year in which you made the gift or sale to charity. HMRC produces another calculator to help you define the value of your donation

And you do not have to pay Capital Gains Tax on land, property or shares you give to charity.

You may have to pay if you sell them to the charity for more than they cost you but less than their market value. Your gain will be the amount the charity actually pays you, rather than the value of the asset.

Leaving gifts to charity in your will

If you leave gifts to charity in your will your donation will either:

  • be taken off the value of your estate before IHT is calculated
  • reduce your Inheritance Tax rate, if 10% or more of your estate is left to charity.

The Charities Aid Foundation can help you with donating to charity.

Last year, it helped almost 3,000 UK philanthropists give £177m to charity.

Further reading: Inheritance tax reform is (finally) on the way

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