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Taxation by Mark McLaughlin ATII TEP

Mark McLaughlin ATII, ATT, TEP tells the sequel to a well-known tale involving a famous miser not previously known for his charitable giving.Great Uncle Ebenezer seemed to be having a relapse. Having had a 'funny turn' last Christmas, his subsequent unprecedented generous behaviour was starting to show signs of deterioration, and he seemed to be reverting to his previous reputation as a miser. As the following year unfolded, he became increasingly dissatisfied with tax relief at the higher rate on his charitable donations under gift aid, and grumbled about wanting more. (All references here are to the Taxes Act 1988, unless otherwise stated.)

Then one day, Uncle asked me to review his tax and financial affairs (on a pro bono basis, of course). Sifting through his records, I noted that his property portfolio included 'Bleak Mill' where he once thrived as a candle manufacturer, exploiting a large, hungry workforce ('No such nonsense as the national minimum wage in those days' he sighed, reminiscing fondly). Uncle had inherited the property many years before from the estate of his business partner, Jacob. Following the demise of his candle-making concern, Bleak Mill was let out, albeit intermittently as tenants were difficult to find (at least they were on Uncle's extortionate terms). More recently, the property had been empty and was falling into a state of disrepair due to Uncle's reluctance to pay for its upkeep.

Bleak Mill

As luck would have it, Bleak Mill is situated in an area of town that has undergone major regeneration and transformation into leisure developments in recent years. Consequently, property values increased dramatically and Uncle had already received substantial offers for Bleak Mill (he promptly rejected them all, disillusioned at the prospect of capital gains tax taper relief at the 'trifling' non-business asset rate on most of his large chargeable gain). But if he could get a good enough offer, he was thinking of using the proceeds to finance this year's cash gifts to charity.

'Have you ever considered giving Bleak Mill to charity?' I tentatively asked. Upon reflection the timing of this question could have been better, as Uncle was swallowing a mouthful of tea. 'Have you lost your senses?' he enquired, clearly shocked as he fervently mopped my tea-sprayed suit. 'Why on earth would I give a valuable property to charity?' I quickly replied that tax relief is available for gifts of land and buildings to charity. Uncle retorted that he already received tax relief on his charitable cash donations under gift aid (section 25, Finance Act 1990, as amended by section 39, Finance Act 2000).

I explained that payments under gift aid are treated as paid net of basic rate tax, and that he received tax relief at the higher rate on the gross amount. By contrast, a deduction could be claimed against total income for the tax year in which the freehold interest in Bleak Mill was gifted to charity (section 587B(2)(a)(i)).

Sudden interest

Uncle was starting to pay attention. After all, he originally inherited the property, so it had cost him nothing. Assuming that Bleak Mill was an outright gift to charity, the available deduction from total income would be based on market value of the property at the time of disposal, plus any incidental costs of disposal (section 587B(4)(a), (6)). He had received a substantial bonus during the tax year from his crutch manufacturing company, Tiny Tim Limited, suffering deduction of 40 per cent tax under pay-as-you-earn. From my review of his financial records, it appeared that the potential deduction for Uncle's charitable donation would all but cover his projected income taxable at higher rates, mainly comprising taxed investment income and earned income from Tiny Tim Limited. The prospect of an income tax repayment initially excited Uncle, but his enthusiasm soon waned.

'What about capital gains tax?' he mused. I pointed out that there would be no chargeable gain on the disposal of Bleak Mill (by virtue of section 587B(3) and section 257(2), Taxation of Chargeable Gains Act 1992). 'Surely it can't be that simple?' asked Uncle, waiting for the inevitable 'catch'.

I explained that the charity of his choice must agree to accept the property by furnishing Uncle with a certificate specifying the qualifying interest in land and the date of its disposal, and stating that the charity has acquired that interest (section 587C(4), (5)). A 'qualifying interest' is broadly a freehold or leasehold interest in United Kingdom land (a separate definition applies to land in Scotland) (section 587B(9A), (9E)).

His plan had been to sell the property and use the proceeds for gift aid donations. This would have incurred a large capital gains tax liability and the net after tax would gross up at only 22 per cent:

Proceeds	50,000
Capital gains tax (say)	13,000
Available cash	37,000
Donation of £37,000 grossed up at 22%	47,435
Tax recoverable
By charity	10,435.70
By Ebenezer	8,538.30
	18,974.00

Uncle's share of the income tax relief would not cover his capital gains tax bill, let alone shelter his bonus. If, on the other hand, he gave the property to the charity, the capital gains tax liability would not arise and he would have income tax relief of £50,000 at 40 per cent, which is £20,000. Furthermore the charity could sell the property for £50,000, which is also more than it would receive under Ebenezer's gift of cash idea.

Having decided to gift Bleak Mill to charity this year, Uncle then turned his attention to charitable donations next year. His investments included quoted shares and securities, and I asked Uncle whether he might consider gifting some of them to charity. 'Only if I get a good tax deal', he growled rather uncharitably. I confirmed that income tax and capital gains tax relief apply to shares or securities listed or dealt in on a recognised stock exchange, as it does to a qualifying interest in land (section 587B(9)). This includes shares listed on the Alternative Investment Market (Revenue leaflet IR178). Uncle pointed out that he owned a large number of shares in Marley plc, which were acquired in the early days of the company, and that those shares (valued in accordance with section 272(3), Taxation of Chargeable Gains Act 1992 ) had increased considerably in that time, notwithstanding the more recent general downturn in share prices. There was a warm glow of satisfaction on Uncle's face as he contemplated 40 per cent income tax relief, a further potential tax repayment, and the avoidance of a large chargeable gain on some or possibly all of his Marley plc shares.

Uncle was uncharacteristically happy. Not only would he be (seen by others as) generously giving to charity and avoiding any disturbing ghostly visitations next December, but he would also be divesting himself of a dilapidated old building, avoiding a large capital gains tax bill and obtaining a tax windfall from the Inland Revenue for an asset that cost him nothing. Not to mention the free tax advice ...