A growing trend for financially successful families includes the objective of ensuring they have more control over the direction of their charitable donations, how they can engage the generations which follow and using family business structures as a resource. This has become known as Personalised Philanthropy.
In this article we focus on the available tax reliefs when funding a family charity.
When an individual makes a gift aid donation, the government will automatically pay the associated basic rate tax to the charity. The grossed up donation then increases each tax threshold of the donor, therefore if the individual is a higher or additional rate taxpayer, it has the effect of moving income down into lower tax brackets.
Ida has taxable income of £320,000; she makes a gift aid donation of £50,000.
- The Charity receives a further 12,500 from the government.
- Ida’s basic rate band of £37,500 increases to £100,000 and the additional rate threshold increases from £150,000 to £212,500.
- Ida receives additional tax relief of £15,625 through self-assessment.
If an individual wishes to gift an asset to the charity rather than cash, the rules provide that no capital gain should arise. In addition, as a general rule, the value of asset (and incidental costs) can be deducted against taxable income, providing income tax relief. This relief is limited to a few assets including quoted shares, OEICs, unit trusts and UK land.
As well as financing a family charity during lifetime, gifting on death is also possible. If at least 10% of an individual’s net estate on death is left to charity, the executors will benefit from a lower inheritance tax rate of 36%.
If the trust deed permits, a capital distribution to a charity generally will not attract an inheritance tax-related exit charge. Alternatively, income distributed to a beneficiary can be gift aided personally and income tax relief obtained.
Qualifying charitable donations attract corporation tax relief, but no further relief for the charity.
As for individuals, companies can also gift the assets outlined above, obtaining corporation tax relief. They can also make gifts of stock, plant and machinery.
Payroll giving allows deductions from an employee’s gross pay before tax is deducted, for onward payment to the charity, generally through a payroll giving agency. In addition, seconding staff members to a charity will not restrict the amount of corporation tax relief the company can obtain on their remuneration.
If you have a cause close to your family’s heart, Personalised Philanthropy via a family charity can enable you to have sufficient control, leaving the legacy you envisaged as well as a lower tax bill.