Charitable giving

I’m in line for a nice bonus and would like to donate some of it to charity. What’s the best way?

The taxman shows a kindly streak when it comes to giving to charity. Money gifts receive 28 per cent extra from HM Revenue & Customs if you fill out a Gift Aid form. For every £100 you put in, the charity can claim back £28.20 of basic rate tax from the Revenue. Higher-rate taxpayers can reclaim a further £23.08 (ie 18 per cent of the gross donation of £128.20) on their tax return. Non-taxpayers can’t use Gift Aid, as there’s no tax to claim back.

Individuals can “carry back” tax relief on a charitable donation to the previous year – if you’re a lower rate taxpayer, but were on the higher level last year, you can claim back money at the higher rate.

How do I make a tax-efficient, regular donation?

Some employers operate a payroll-giving scheme, where the company deducts the charitable contribution each month from your salary pre-income tax, and channels it to your chosen cause. A monthly donation of £100 would cost a lower-rate taxpayer just £78, or £60 for someone at the higher rate.

Alternatively set up a direct debit in favour of a charity of choice, with a Gift Aid declaration for maximum tax efficiency.

What about those odds and sods of shares I’ve got lying around, from flotations and employer schemes?

Jolly good wheeze this. Share gifts to charity not only attract income tax relief at your higher marginal rate, but can save you capital gains tax too. A £1,000 share gift to a charity could end up costing a higher-rate taxpayer as little as £200. You can also claim income tax relief on brokers’ fees. A variant is that donors can sell shares to the charity at below market price.

Similar income and capital gains tax reliefs apply to gifts of land and buildings.

I’ve heard I might be able to use an Alternatively Secured Pension to give tax-efficiently to charity. Was that scuppered in the Pre-Budget Report?

No. By imposing an effective tax charge of as much as 82 per cent on money that’s handed down, chancellor Gordon Brown has rendered ASPs unattractive as a means of avoiding inheritance tax. An ASP is the alternative to buying an annuity with your pension pot at 75. With an ASP, you can maintain control over your money and receive an income. Anything that’s not paid out when you die can be bequeathed to a charity tax-free.

If you have a large pension pot, and don’t need it to support dependants, then your remaining ASP could be left to a charity with no tax to pay.

My accountant told me about a “shell company scheme” – it sounds like I could make a bob or two, while giving to charity.

You’re unlikely to get away with this one. Recent headlines have seen some high-profile individuals investing in shell companies listed on Aim which, after flotation saw the shares rocket in value. Under the scheme, these shares were then gifted to a charity, gaining the tax relief on the inflated share price. In many cases the shares then fell in value, meaning the tax relief to the donor was worth a high proportion of the value of the gifted shares.

But Mike Warburton, senior tax partner at Grant Thornton, warns these schemes are provocative and that HMRC is challenging the arrangements on the grounds of artificial share pricing.

What is a charitable trust, and should I be setting one up?

Charitable trusts are a tax-efficient mechanism whereby individuals can endow a fund, for donations normally over a long period. Sums get tax relief on the way into the fund, and payouts can be out of the trust’s investment income and/or capital. Individuals retain greater control of the money, than giving it all away as a one-off. Warburton says set-up and running costs can be considerable, and recommends a minimum endowment of £100,000. The Charities Aid Foundation runs a cheaper arrangement, with trusts from £10,000.

On a more modest note, charity credit cards seem like a painless way to give. Do you rate them?

Charity cards don’t actually pay much to charity. The provider makes a donation of £2.50-£18 when you sign up (which can’t be grossed up under using Gift Aid), and then gives typically 0.25 per cent of expenditure to the charity concerned. Comic Relief gets 0.5 per cent. Amex Red card pays 1 per cent up to £5,000 of annual spending then 1.25 per cent above that, to a fund fighting Aids in Africa.

The Amex Platinum card awards up to 3 per cent cashback for the first three months, then up to 1.5 per cent thereafter. You could give the sum you receive to charity.

Charity cards are only suitable for those who pay off their bills in full in each month as interest rates aren’t the most competitive.

What if I’m cleaned out with the Xmas binge?

Give in kind instead. Blue Peter’s Shoe Biz appeal wants your shoes to support Aids orphans in Malawi; charity shops gratefully receive clothes in good nick; Oxfam accepts old phones, computers, stamp collections and so on.

Or give your time. Visit www.timebank.org.uk to find out about the ways you can volunteer to help causes dear to your heart. Individual charity websites have information on how to get involved in fundraising events.

Finally, will I have to pay inheritance tax on charitable donations?

Any bequests made to charity in your will are automatically out of your estate for IHT purposes.