Charity starts with a tax bill

High earners are planning to give more to charity this year as they seek to avoid paying the new higher rates of income tax, according to financial advisers.

Wealth managers are advising clients that donating to charity can help to manage both income and capital gains tax liabilities.

“Quite a few clients are talking about how they can beat the system by making donations to charity,” says Ceris Gardner, a partner at Maurice Turnor Gardner, a law firm.

Advisers say the move
is attractive to people on incomes of between £100,000 and £112,950 whose marginal income tax rate is now 60 per cent, because of the loss of their personal allowance.

Those who expect to earn just over £150,000 this year are also looking at charitable donations to avoid paying the top 50 per cent rate of income tax.

“People are very interested in charitable giving now that tax rates have risen, particularly now it’s gone up to 60 per cent in some brackets,” says Kevin Custis, a director at Rathbones’ trusts business.

Custis says he is taking instructions from clients who want to arrange for their income to be under £100,000 this tax year.

For example, someone earning £104,000 could opt to give away £5,000 to charity to avoid paying 60 per cent on their top £4,000 slice of income.

If the donation is made through the Gift Aid scheme, it is deemed to be net of basic rate tax at 20 per cent, reducing the donors’ income by £4,000 to £100,000 for the year. The charity can reclaim the basic rate tax so that it receives the full 5,000. Then the donor can claim the remainder of the income tax paid – which is 40 per cent (60 per cent minus the 20 per cent already reclaimed) – giving an effective saving of £2,000 in tax.

Certain wealthy individuals who earn some income in the UK but are non-domiciled might even give their UK income to charity to avoid paying tax in the UK, according to Gardner.

Some investors are also planning to transfer their share portfolios to charities. This creates a double tax saving as donations to charity are also free of capital gains tax. Gardner says that transfers of share portfolios are particularly beneficial for charities, which can wait to sell the shares once the market rises.

Some charities are restructuring themselves to be able to receive such donations from wealthy investors.

Custis and Gardner have both found that many wealthy donors are now choosing to give money
to community foundations in their area, which channel the money to projects
in need of funding, such
as schools or building projects.

“A feeling we have is that as the government says it will cut back on spending, wealthy people will be minded to support their community,” says Custis.

Animal charities such as the Battersea Dogs and Cats Home in London also remain very popular with clients, Gardner says.

Another trend is towards sustainable charitable giving: for example, donations to micro-finance projects in developing countries to allow people to build up their own businesses.

Most benefactors still prefer to wait until the end of the tax year to make their donation when it is clear what their actual income will be and how much they need to give to charity.

Patricia Mock at Deloitte points out that this means people will not see the benefit of the tax saving until they do their tax returns the following year.