March 21, 2012 5:31 pm

Charities warned over tax relief cap

A cap on the amount of relief for anyone reclaiming more than £50,000 income tax a year could discourage major donors from giving to charities, say accountants.

While the pensions industry breathed a sigh of relief that no changes were made to pensions higher-rate tax relief in the Budget, a new cap would limit the amount that higher-rate taxpayers can reclaim in other areas, such as charitable giving.

Currently, when a higher-rate taxpayer donates to a charity, some of the tax can be reclaimed. From April 2013, the maximum that can be reclaimed will be £50,000 per year, or 25 per cent of the individual’s income, whichever is higher.

George Osborne, chancellor, said: “It can’t be right that some people make unlimited use of these reliefs year after year. . . to make sure that those on the highest incomes contribute a fair share I am introducing a new cap on those reliefs that are currently uncapped.”

However, accountants said the move would make it substantially less attractive for individuals to make large charitable donations and warned that the government would need to address this to protect charities.

Chris Groves, partner in the wealth planning team at international law firm Withers, said: “This measure will particularly affect large donations by philanthropists, who may have donated amounts significantly in excess of their annual income and will now see the tax relief and incentive for giving reduced.

“This measure and new rules to be introduced that will reduce the rate of inheritance tax for estates leaving 10 per cent to charity may together have the effect of encouraging delaying giving until death, creating a significant funding gap for charities.”

Richard Proctor, managing partner at Grant Thornton, said the measures have been introduced to target the practice of setting up lossmaking businesses purely to claim tax relief.

The limit will include, but not be restricted to loss reliefs against total income, qualifying loan interest and gift aid and charitable gifts of land and shares.

Louise Somerset, tax director at RBC Wealth Management, said: “The proposal to limit the availability of certain tax reliefs for losses and investments to a maximum of 25 per cent of total income does not appear unreasonable. But the inclusion of gift aid relief – if this is correct – would seem to be an unfortunate side effect, as anything which discourages charitable giving is disappointing.”

Sir Stephen Bubb, chief executive of the Association of Chief Executives of Voluntary Organisations, added: “Charities are hopping mad. Limiting how much people can give in gift aid and charitable donations puts a torpedo through government attempts to encourage more giving. George must exclude charitable giving from the tax allowance limit.”

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