There have been various initiatives proposed or developed recently as regards donations to charities, in particular substantial donations, and the tax effect of these. Some of these are summarised as follows.
Government proposal to cap tax benefits of substantial donations
Introduced in the Budget in March 2012, the Government proposes from April 2013 to limit the tax reliefs an individual may claim where currently, for certain tax reliefs, these are unlimited. This includes gifts to charity. The proposed cap is 25% or £50,000 if greater of an individual's annual income.
Philanthropists and charities have reacted angrily and a campaign has been initiated in response, Give It Back George, which has swiftly gained momentum: www.giveitbackgeorge.org. At a meeting in April with philanthropists Nick Clegg appeared to signal a change and David Cameron may follow up on this when he addresses philanthropists in May before the start of the consultation exercise. A compromise might be a limit on tax reliefs for charitable giving of 50% of a person's income, which would be broadly in line with the position in the US.
HMRC's Tainted Donations Rules
Effective from April 2011, these largely replace the previous much criticised Substantial Donor Rules. Both were designed to address charitable donations which are motivated by tax avoidance. The Rules (in Schedule 3 Finance Act 2011) now deny tax relief to individuals who give to a charity or community amateur sports club where the intention of the donor (or someone connected with him) is to obtain a financial advantage from the charity. 'Connected' means a spouse, civil partner, or close company.
The emphasis is now therefore squarely on the motive rather than the size of the donation. Three conditions must be met for a donation to be tainted:
- the donation and the arrangement would not have been undertaken separately;
- the main purpose of the donation is to obtain a financial advantage;
- the donor is not the charity's own trading company or a non-profit social housing provider.
If the Rules apply, tax reliefs on the donation are denied to the donor. The Rules are not intended to catch innocent arrangements for philanthropic purposes. Charities will only be penalised (e.g. the amount of the tax relief recovered form the charity) if they knowingly connive in a tainted arrangement. HMRC has a note on the Rules on its website.
Reduced inheritance tax where 10% or more of an estate is given to charity
Introduced in the White Paper "Giving" (see below) this scheme proposes a reduced rate of inheritance tax will apply to an estate where 10% or more of the net estate is given to charity. Lauded as a way of making charitable giving easier, the details as to how this scheme works are not altogether straightforward. The scheme is contained within the Finance Bill 2012 and applies to deaths occurring after 6 April 2012 (the Bill is not yet enacted but HMRC are accepting applications under this scheme).
The proposed scheme works thus. Each of three components in an estate is considered: the survivorship component, settled property component and general component. If charitable gifts in any of these components are 10% or more of the baseline amount (after taking into account the inheritance tax threshold, currently £325,000, and calculated according to a given formula) then inheritance tax is reduced for that component from 40%to 36%. The basis of the three components and the baseline amount are all set out in detail. It will be possible to 'merge' components in certain circumstances.
The drafting of Wills and administration of estates to take account of these proposals is not likely to be straightforward.
Gift Aid rules tightened
HMRC has published updated guidance on the points that must shortly be covered by Gift Aid declarations so that a charity or community amateur sports club can claim the relief. In short, more detail is required.
HMRC's guidance and model declarations make clear the declaration must contain certain information about the donor and show that the charity or CASC has advised the donor they must pay enough tax to cover all their charitable donations and not just the donations made to a particular charity at that particular time.
If the explanation is not given the declaration will be invalid and Gift Aid will not be due on the donation. Charities have until the end of 2012 to make changes. HMRC will continue to accept Gift Aid claims and donations made using forms based on the wording in the old HMRC model declarations until the end of the year. Declarations in use at the end of the year (i.e. declarations made before 31 December 2012 relating to current or continuing donations) will remain valid.
New definition of Charity for tax purposes
From 1 April 2012 the new definition of a charity under Schedule 6 of the Finance Act 2010 has applied to all UK charity tax reliefs and exemptions administered by HMRC.
All charities that do not claim Gift Aid but claim other UK charity tax reliefs and exemptions administered by HMRC are affected by the new definition. Charities that claim Gift Aid have been required to meet the new definition since 1 April 2010.
In order to continue to be eligible for the charity tax reliefs and exemptions, charities must:
- be established for charitable purposes only;
- be located in the UK or an EU member state, Iceland or Norway;
- be registered (where the law requires this) by the Charity Commission or equivalent regulator in the case of charities outside England and Wales;
- only engage people to manage the charity's finances who are fit and proper persons. More information on the fit and proper persons test can be found on the HMRC website.
Government's 'Giving' White Paper
This joint White Paper was published by the Cabinet Office and Office for Civil Society in May 2011 and aimed to explore how to increase giving of time and money to charitable and philanthropic causes. Some of this addresses tax incentives, although it is a wide ranging document. The framework set out includes:
- making it easier to give: encouraging new ways to give such as via ATM machines and mobile phones, new volunteering arrangements, investment in the Philanthropy UK website, and removing barriers to giving such as improving the vetting and barring scheme and increasing volunteer allowances;
- making it more compelling to give: reducing inheritance tax where 10% or more is given to charity (see above), consulting on encouraging more gifts of pre-eminent works of art and historical objects to the nation in return for tax reduction, increased match funding, and creating new social norms for volunteering, philanthropy and citizenship;
- giving better support for those providing opportunities to give: investing in local civil society infrastructure, streamlining Gift Aid, and increased funds to train volunteer managers.
For further information, contact Chris Knight, Head of Charities on 01604 463103 or click here to email Chris.