Beware of traps when bearing gifts

In these times of austerity and belt-tightening, it is reassuring to know that individuals are still - perhaps increasingly following the record set by the Children in Need campaign - conscious of their responsibility towards their fellow man.

Whether this is down to the ‘big society’ or the age-old generosity of human spirit, it does not matter.

While tax planning is not the main driver, most donors are keen that a gift is as beneficial as possible for both the charity and themselves.

All lifetime gifts are exempt from inheritance tax so the impact is immediate for IHT purposes. Similarly, assets left to charities on death do not suffer IHT, and for deaths after 5 April 2012 the rate of IHT on the remaining estate could be reduced from 40 per cent to 36 per cent. But what of income tax and capital gains tax?

If a gift of cash is made under the Gift Aid scheme, the charity is able to recover 20p from the government for each 80p gifted and the donor is regarded as having made a gift of £1. This then reduces the amount of income chargeable to the higher rates, thereby delivering higher rate tax relief.

By way of example, for a 40 per cent taxpayer the charity recovers 20p for each 80p gifted, while the donor’s personal income tax liability is also reduced by 20p, a total saving of 40p on a deemed gross gift of £1. For a 50 per cent taxpayer the figures are 20p and 30p respectively.

A further tax planning opportunity arises because a qualifying Gift Aid donation can be carried back to the last completed tax year as long as both the gift and the claim are made before the 31 January following. The claim must be made on the return for the tax year for which relief is claimed.

This way the tax relief is advanced by 12 months and it might be possible to increase the rate of tax relief. For example, where an individual’s gross income is in excess of £100,000, the personal income tax allowance is reduced by £1 for every £2 of excess income. This particular rule results in income being taxed at 60 per cent in that band of income in which the personal allowance is reduced.

By carrying back Gift Aid payments to a year to which this applies, it might be possible to reduce income to below £100,000 for this purpose and thus reinstate the personal tax allowance. The rate of relief can then be up to 60 per cent.

In the same way, carrying back Gift Aid payments can result in a higher rate of relief, say because the donor’s income is lower in the year of donation.

One final important point is that it is not possible to carry back part of a donation. If a donor wishes to carry back only part of their proposed charitable donation in the year, it is necessary to split the donation between two separate gifts, one of which can then be carried back.