With the news that Bill Gates has recently donated a staggering $4.6bn to charity in the form of Microsoft shares, it is important that individuals consider their own charitable donations carefully to make the best use of tax reliefs.
Whilst most taxpayers in the U.K. would not be in a position to donate as much as Bill Gates, even a modest donation can make a difference.
Robert Pullen, Director at Blick Rothenberg, explains: “The most common method of charitable giving in the U.K. is a gift of cash. Providing the individual has paid enough income tax or capital gains tax, they are able to 'gift aid' the donation so that the charity can claim back an additional 25% of the donated amount.
“This additional amount from the gift aid declaration also benefits the taxpayer who has made the donation. Once the individual has made the gift aid declaration, they are able to claim tax relief against their personal income tax liabilities,” he added.
For a higher rate taxpayer, the effective tax relief is 25% and can be even higher if the individual is within the High Income Child Benefit Charge, is losing their personal allowance because their income exceeds £100,000 or if they earn over £150,000.
The other method of donating to charity is by donating listed – including AIM (Alternative Investment Market) – shares, rather than cash. This can be even more tax efficient, depending on the circumstances.
Pullen said: “If an individual is considering making a donation but needs or wants to sell shares first, they would incur capital gains tax if the shares have increased in value since acquisition. To avoid this, they should take a leaf out of Bill Gates' book and donate the shares directly to the charity. Not only will they save the capital gains tax - that's up to 20% of the gain - they also get a deduction against their income for the value of the shares gifted, which gives effective income tax relief of 40%.”
However, Pullen added one final note of caution: “Whilst it is obviously commendable to be philanthropic, a common trap is where individuals make the gift aid declaration but haven't paid sufficient tax to cover the amount the charity claims back from the government. Individuals should only make the declaration where they are confident they can meet this, as they will otherwise be required to pick up the tab.”