Tax Planning

How generosity can result in tax benefits

By September 10, 2020 No Comments

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

It’s easy to assume that financial planning is all about ourselves. Yet there is a place for giving and charity too. Moreover, engaging in generosity can also make sense from a tax perspective – both for the giver and also the recipient. In this short guide, our financial planning team here at Elmfield offer these thoughts on charitable financial planning and its tax benefits. We hope you find this content useful. If you’d like to speak to an independent financial adviser regarding how to make your own giving more tax-efficient, then you can reach us via:

T: 01282 772938



Gifting money to charity

There are many reasons to be generous. Perhaps there’s a cause you believe in passionately, and you wish to support it financially. It may even be that you are spurred by a deeply personal event in your life – or in those you love. Many people are driven to cancer charities, for instance, because they have experienced the pain it causes within families. The first step, of course, is to decide which causes you care about and which organisations could be viable candidates for your charitable giving. 

Once this important step is completed, however, it’s also key to consider how you will give your money to these organisations and causes. After all, every penny saved on tax when you give represents an extra penny that can go towards these endeavours. For UK residents and payers of Income Tax, for instance, a good place to start is to consider Gift Aid. In 2020-21, this allows your donation to receive a 25% boost from the UK government. So, under Gift Aid, a £5,000 donation to a charity could be grown to £6,250. 

For those on a higher rate of income tax, moreover, using Gift Aid can also result in a nice tax benefit for you as well. For those on the basic rate automatic relief is already given, but higher rate taxpayers can claim back the difference between their rate and the basic rate. So, suppose you make a £200 Gift Aid donation as a higher rate taxpayer. Gift Aid will grow this donation by 25% to £250. However. Since you pay 40% tax, you could claim back £40 (i.e. £200 x 20%).


Capital gains tax (CGT) liability

It is common to assume that you can only give cash to a charitable cause. Yet it is also possible to give assets and investments too. For instance, perhaps you might choose to donate a fund with unrealised gains to a charity. In 2020-21, this can be done over and above your annual CGT exemption (i.e. £12,300). From there, the charity could sell the investments without any CGT liability – converting it into cash which can then be put into good use. 


Inheritance tax (IHT) liability

In 2020-21 the IHT rules generally will levy a 40% tax on the value of an estate over £325,000 when an individual dies (with certain important caveats). One way to potentially reduce an IHT bill, however, is to leave some of your estate to charity. If, for example, you leave at least 10% to one or more registered charities in your will, then your IHT rate is reduced from 40% to 36%. This can result in a lot of money going to a noble cause as well as a big tax saving. 

Suppose, for instance, you leave 10% of a £500,000 estate to charity. Assuming that you do not own your home and that no other allowances apply, in normal circumstances there would likely be a £70,000 tax bill (i.e. (£500,000 – £325,000) x 0.4). Yet since you gave 10% to charity in your will, your IHT rate is reduced to 36% and results in a £45,000 final IHT bill (i.e. (£450,000 – £325,000) x 0.36).


Trusts and social enterprises

If you’re looking to involve your loved ones in your charitable giving, then setting up a family trust can be a great way to engage everyone in tax-efficient philanthropy. Here, it is possible to appoint certain family members as trustees whilst others might be better suited to fundraising or volunteering. The key aim of such a trust is to be clear about what happens when you (i.e. the settlor) dies, since this will help to ensure the trust’s vision continues as a legacy. 

Social enterprises can also be a powerful philanthropic financial planning tool. Here, a social enterprise reinvests its profits into local businesses/causes – e.g. those which tackle problems with homelessness or environmental degradation. As an extra benefit, the money which you invested (assuming all goes well!) is eventually given back to you so you can invest it again in a similar project or venture elsewhere!


Conclusion & invitation

If you are interested in starting a conversation about your own situation then we’d love to hear from you. Get in touch to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire. 

Reach us via: 

T: 01282 772938