Tax Effective Giving Money Guide

independent financial advisers & wealth managementThere are varied tax-effective and efficient ways of making monetary gifts to any charitable cause that is close to your heart. These options are often changing through fiscal legislation. We are sure you agree that as part of wise financial management, it is important to maximise the effect of your giving. To this end we have produced this Tax Effective Giving Guide.

Here are some helpful pointers, which could help you increase your giving or the effectiveness of your gifts!

Gift Aid:

For an individual who is paying tax, it is vital that any charitable donation is Gift Aided. In ticking the Gift Aid box, the donor is declaring that they have paid tax of an amount at least equal to the level of tax claimed (in other words the gift has come from taxed money). This allows the charity to approach the Inland Revenue and claim back the basic rate tax of 20%.

Types of taxable income include, for example, earned income, pension income, interest from saving accounts and dividends.

Therefore, a gift of £1,000 from a basic rate taxpayer would actually result in a total benefit to the charity of £1,250 at no extra cost to the donor!

For higher rate taxpayers it’s even better! The difference between basic rate and higher rate tax can be claimed back by the donor through a declaration on their tax return. This can be claimed back for gifts from the past five tax years, so all is not lost if this relief has not been claimed yet!

In essence, giving has become the most effective way of reclaiming back higher rate income tax as whilst basic rate tax is reclaimed by the charity, all higher rate tax is reclaimed by the donor as the table below illustrates.

Income Tax Band Income Tax Rate Personal Reclaimable Tax Charity Receives
£0 - £11,000 0% 0% 0%
£11,001 - £43,000 20% 0% 20%
£43,001 - £100,000 40% 20% 20%
£100,001 - £122,000 60% 40% 20%
£122,001 - £150,000 40% 20% 20%
£150,001+ 45% 25% 20%

For those earning between £100,001 and £122,000 note the anomaly of the actual rate of tax. A gift can help negate this.

Higher rate tax relief is easily claimed back through Self Assessment and can encourage the donor to make a bigger gift than planned!

Giving of shares and other investments:

Gifts made from shares, collective investments, land or property also need to be made in a certain way so as to maximise the tax efficiency of the gift to both the charity and the donor. Many donors assume that the best process is to sell the investment and then gift the proceeds. The sale could give rise to a Capital Gains Tax liability, which could have easily been avoided if the investments were gifted straight to the charity. Not only will the Capital Gains Tax have been avoided, but the gift would still attract income tax relief as if it were a cash gift. For a higher rate taxpayer this could mean receiving tax back instead of paying tax!  Professional financial advice should be obtained on both options before implementing the gift.


The Inheritance Tax threshold (the amount over the value of an estate on which Inheritance Tax is due on death) will remain at £325,000 until 2018.  When the value of houses, investments and savings, and pension funds are included, this amount can easily be breached. The total value of the estate over the threshold is taxed at 40% and paid by the beneficiaries. For example, an estate valued at £750,000 would incur tax of £170,000 (£750,000 - £325,000 x 40%) reducing the estate down to £580,000

This should encourage donors to leave a legacy in their Will. Any bequest to a charity is taken off the value of the estate before the calculation for Inheritance Tax is made. In other words, any gift will potentially save 40% Inheritance Tax.

It may, therefore, be time to re-visit your estate planning and then update your Will.

Accelerated Legacies:

Whilst many generous donors have left a gift to charity in a Will, the beneficiary is both unaware of the gift and also has to wait until the death of the donor before they can receive it.

With the help of a Financial Planner who can calculate the cost of meeting your needs and achieving your goals, there comes a freedom to start to give generously through your lifetime.  This has the added benefit of giving the donor the joy and satisfaction of actually witnessing the difference they are making whilst they are alive.

An additional incentive is that a lifetime gift not only enjoys the benefit of Gift Aid (see table above) but also reduces the value of your estate, potentially saving 40% of unnecessary Inheritance Tax!

Deed of Variation:

When a Will comes into force on death, there is a two-year window of opportunity to change the contents (if all affected beneficiaries agree) which could mitigate any Inheritance Tax to pay. Alternatively, if a beneficiary is concerned that the bequest will only cause them a future Inheritance Tax headache because they already have sufficient assets or are perhaps elderly themselves, a change to the Will so that the bequest is a gift to charity will solve this problem.

The tax advantage could be a double benefit in that the change made could generate back Inheritance Tax paid at the 40% rate and the beneficiary could also claim back income tax under Gift Aid at his marginal rate. In this set of circumstances both the charity and the donor benefit. 

If you have received an inheritance in the last two years and paid Inheritance Tax, it may well be beneficial to seek independent advice.

If you would like to know more about tax effective giving for you or your charitable organisation then please telephone us at the number below.

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