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In the eighth of a series of extracts adapted from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton highlights a potential tax trap regarding Gift Aid donations.

Income Tax and Capital Gains Tax

A payment to a charity, which may be one-off or regular, can attract two forms of tax relief under the Gift Aid regime (FA 1990 s 25). First, a payment to the charity of an amount under deduction of Income Tax at the basic rate enables the charity to recover that basic rate tax from HMRC. So, with a basic rate of 20%, a payment of £80 is treated as a gross payment of £100 on which the charity can recover £20. This assumes that the donor has paid sufficient Income Tax or CGT to cover the tax recovery: if not, there will be an unexpected tax liability on the donor (under FA 1990 s 25(8)).  Second, to the extent that the donor is a higher or (from 2010/11) an additional rate taxpayer, he can recover higher or additional rate tax relief on the amount of the gift, that is, £20 or (in 2010/11) £30 on the above figure. So the cost of putting £100 into the hands of the charity is just £60 or £50.

Tax Trap

It’s an obvious point, but a potentially expensive one to get wrong: ensure that the donor has paid sufficient Income Tax and/or CGT in the year of the donation to support the tax reclaim by the charity. If not, the charity gets the tax back and the donor gets a tax bill.

Separately, there is also a relief for gifts of shares and securities, and of land situated in the UK, to charity (ITA 2007 ss 431-446). And any gain arising on the gift does not attract CGT (TCGA 1992 s 257). The charity is treated as inheriting the donor’s base cost. And so any gain realised by the charity on sale will not attract tax, assuming of course that the proceeds are applied for charitable purposes.

Territorial Scope

Traditionally, to benefit from UK tax relief, the charity must be established in the UK. And any Income Tax relief for gifts of land to charity is limited to UK land. As noted in Chapter 12 these limits have been extended to the EU, Norway and Iceland following a recent ECJ case from Germany.

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

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