Gift Aid Print
Charitable donations made under Gift Aid qualify for beneficial tax treatment. Where donations are made by individuals, the donation is treated as being made net of basic rate tax deducted at source at the rate of 20% by the donor. The charity is able to recover this basic rate tax as a repayment from HM Revenue & Customs. The donor is able to obtain higher rate tax relief on the amount of the grossed up payment.
On 1 July 2021 Henry, a 45% additional higher rate taxpayer made a donation of £1,600 under Gift Aid to the Red Cross. The value to the charity is £2,000, being:
|Amount of donation||1,600|
|Basic rate tax recoverable from Basic rate tax recoverable from HM Revenue & Customs||400|
|Total amount receivable by the charity||2,000|
Henry is entitled to higher rate tax relief on the grossed up donation of £2,000, which is equal to tax relief of £500. Accordingly the net cost to Henry of making the donation is £1,100, but the charity has received a total amount of £2,000.
In the event that the donor has not paid sufficient tax to cover the tax deducted from the Gift Aid payment, the donor has to account to HM Revenue & Customs for the additional tax withheld by him in his self-assessment Tax Return.
For the donation to be treated as made under Gift Aid the donor must make a declaration, either in writing, electronically through the Internet, or orally, to the effect that the donation has been made under Gift Aid. It is common practice for the recipient charity to provide a statement which may be signed by the donor to confirm that future donations should also be treated as payments under Gift Aid.
In addition to cash donations, the following assets may be donated under Gift Aid:
- Shares or securities listed or dealt on a recognised stock exchange (including the Alternative Investment Market (“AIM”);
- Units in authorised unit trusts;
- Shares in open ended investment companies;
- An interest in an offshore fund;
- Either a freehold or a leasehold interest for a fixed term, where the relevant land is situated in the UK.
Where such assets are donated under Gift Aid, the value of the gift is deductible for income tax purposes, (or corporation tax in the case of a donation by a company).
For CGT purposes the gift is treated as being made on a no gain/no loss basis so that no CGT liability arises on the donor. The gift is also exempt from IHT, and accordingly, this is a very tax-efficient method of giving to charity.
Anti-avoidance rules apply where a charitable donation is regarded as a “Tainted Donation”. This measure counters the tax advantage gained by donors who would not have made the donation unless they would gain a financial advantage by virtue of the arrangements entered into. The effect is to deny Gift Aid relief to the donor, or possibly create an income tax charge. This anti-avoidance provision is not directed at genuine philanthropic gifts to charity but is designed to counter transactions which H M Revenue & Customs perceive to be abusive arrangements entered into by some individuals to obtain an unfair tax advantage.
Gift Aid payments by companies are made without deducting tax at source. Accordingly, the charity does not recover any tax from H M Revenue & Customs from corporate donations. The donor company is however, able to obtain corporation tax relief on its donation.
For qualifying Gift Aid payments, the donor may elect to treat the donation as paid during the previous tax year, and an election must be made by the time the donor submits his tax return for the year in which the payment is to be treated as paid. In any event, the election must be made by the normal filing deadline of 31 January following the end of the year in which the payment is to be treated as paid. The election may only be made where the grossed up amount of the payment could have been made out of the donor’s income or gains of that previous year. The election has no effect on the charity receiving the payment. It should be noted that the carry-back only applies to cash gifts, and not to the gift of assets for which relief is only claimable for the year in which the gift is made.