Advantages of charitable gifting are often overlooked

The advantages of charitable giving sadly often get overlooked, both by financial advisers and their clients.

Charitable giving, with tax relief, may do more for society than some flavour du jour unproven venture capital trusts, all too often used as the first port of call for higher rate taxpayers maxed out on pension allowances.

A gift of a few hundred pounds could be a vital lifeline to local and start-up charities, it is also fun to get personally engaged and see the impact of your donations over the years. For IFAs, supporting local charities can attract new clients, improve your reputation, and bring more job satisfaction.

Will they be the richest people in the graveyard? That is not necessarily something to be proud of. Yet, this is a real danger.

Why not start up a payroll giving scheme? Here, employees can use a payroll giving scheme to set up charitable donations directly from their wages to charities of their choice from the 185,000 charities registered in England and Wales (and a further 24,000 in Scotland). 

Payroll giving works like salary sacrifice and saves the charity administrative costs, since they do not need to claim back the tax paid through Gift Aid – it is included in the donation. If you are feeling generous, you can choose to match your employees’ charitable donations.

Will your clients be the richest people in the graveyard?

More importantly, what about your clients? Will they be the richest people in the graveyard? That is not necessarily something to be proud of. Yet, this is a real danger.

This week HMRC revealed inheritance tax receipts soared to £5.3bn (April 2022 to December 2022 receipts) – a huge £700mn higher than in the same period a year earlier.

Too many are unduly cautious, even miserly, living a too frugal retirement, scared that their often vast pension pots will run out before their days are done.

Surprisingly, this gargantuan tax revenue is not solely due to runaway house prices, even though Halifax data shows they have gone up a staggering 974 per cent since early 1983 in just 40 years. Property only accounted for half the wealth in London estates paying IHT compared to just one-third (32 per cent) for the rest of the UK, according to a Just Group FOI.

While most under 50s face pensions penury, unless auto-enrolment contributions rise, the reverse is true for some baby boomers. Many in quite ordinary jobs have index-linked defined benefit schemes and also significance assets in housing, Isas and other products.

Have you informed these clients about the advantages of philanthropy?

Retirees’ greatest fear

For retirees, with modern DC pension pots, their greatest fear is that their money will run out before their days are done if they withdraw too much capital. This is especially true in the inevitable downturns when both investors’ capital and income may be dented without careful management.

And people are living longer; according to the Office for National Statistics, a 65-year-old woman can expect to live until she is 87, while a man of the same age could expect to live until 85. So, their assets really have to sweat for a marathon of two or three decades, possibly longer. 

There are social security perks too. Most advisers tell their clients about pension perks.

But despite rampant inflation and stock market volatility, too many are unduly cautious, even miserly, living a too frugal retirement with few foreign holidays or other fripperies, scared that their often vast pension pots and other assets will run out before their days are done.

This is where the work of IFAs is vital with their cash flow analysis and financial coaching skills.

Yet some IFAs and wealth managers are just content to receive a percentage annual management fee (some would call it pound cost 'ravaging') on the size of dormant assets, often left untouched for years, rather than encourage their ageing clients to withdraw funds to spend some money on themselves or give money away to their children or to charities if they have no heirs.

This is not unusual, according to the Office for National Statistics one in five women in the UK never have children, while a staggering one in four men have no offspring – according to the usually reliable Guardian newspaper. No official figures are available for men as the ONS keeps no records on fathers.

Feel good, save tax 

Giving away assets in your 60s, 70s and 80s can make you feel good and save tax today and tomorrow. Such gifts gain from the magic of Gift Aid, maintained at present rates until 2027, often shrinking higher and additional tax rate liability to zero.

Charities can claim an extra 25p from the government for every £1 you give. It works like this: you donate £100 to a charity, it claims Gift Aid to make your donation £125.

If you pay 40 per cent tax, you can then personally claim back £25.00 (£125 x 20 per cent) via a tax return. In Scotland, you can claim back slightly more as higher rate tax is 41 per cent. If you pay tax additional rates (45 per cent or 46 per cent in Scotland) the payback is even greater.

This could become even more important in 2023 as stealth taxes drag more people into higher tax brackets.

There are social security perks too. Most advisers tell their clients about pension perks. High earners with incomes around £50,000-£60,000 or more than £100,000, (from £43,663 in Scotland) can get even government benefits reinstated, such as child benefit or tax-free childcare if they give to charity.

Your income that is liable for tax is reduced by the amount you give. In return, your taxable income could then fall below the cut off points for these state benefits. This could become even more important in 2023 as stealth taxes drag more people into higher tax brackets.

How a £100,000 gift costs just £24,000

Even if you can’t manage to give away much of your hard-earned cash in your lifetime, leaving a substantial donation to charity in a will at your last hour will have a huge impact.

As Mark Greer, managing director of philanthropy services at the Charities Aid Foundation, points out: “For many donors, a gift to a UK charity is free from IHT.” He explains that the money is ‘removed’ from the value of a donor’s estate before tax is calculated.

He says: “In addition to the donation being tax free, charitable gifts can reduce the amount of IHT paid on the rest of the estate. If 10 per cent or more of the estate is gifted to charity, then the rate of IHT paid on the rest of the estate is reduced from 40 per cent to 36 per cent."

He enthuses with an example: “A £100,000 gift to charity from a £1m estate only ‘costs’ the beneficiaries £24,000.”

Stephanie Hawthorne is a freelance journalist