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’Tis the season of goodwill. The Christmas shopping binge may be well under way, but December is also the peak month for charitable donations in the UK.
The overall figure for charitable giving is rising in the short term — the Charities Aid Foundation (CAF) says it rose from £9.7bn in 2016 to £10.3bn last year. Advisers, however, say that over a longer timeframe some families have trimmed their charitable donations.
Rupert Wilkinson, partner at Wilsons, the private client law firm, says: “We have seen a squeeze on disposable income since the start of the financial crisis. It has meant that some households have cut their charitable contributions.”
The impression left by recent scandals at Kids Company and Oxfam may also have contributed to a fall in giving by some groups. “As these stories continue to unfold in the press, people may be put off by the damage done to the charities’ reputation and be less willing to give to traditional charities,” says Mr Wilkinson.
“Instead of donating to charities and claiming gift aid, people may also now be looking for alternative ways to give, such as directly volunteering their time rather than giving money,” he says.
But no matter how big your donations, it is worth familiarising yourself with the ways to make your money go further. Many higher-rate and additional-rate taxpayers miss out on millions of pounds in unclaimed tax relief a year because of widespread confusion about how the tax breaks on charitable giving work. This, in turn, means the charities themselves receive less in donations.
The FT and its readers have long supported charitable giving and this year’s seasonal appeal is Habitat for Humanity, a charity focused on building safe and affordable homes for families living in poor conditions around the world. Here, FT Money runs through the ways that your money can go further — and how it could actually be an effective part of wider tax planning.
1 Gift Aid
Any donor giving cash to a charity can enhance their donation by signing a Gift Aid declaration. The charity can then reclaim the basic rate tax the donor has already paid on that donation. A £1 donation will therefore be worth £1.25 to the charity, but only if the declaration is signed.
It is not just the charity that makes money. Higher rate taxpayers who fill in a self-assessment form can claim back the difference between higher rate and basic rate tax on the value of their donations. For every £1 donated by a 40 per cent rate taxpayer, they can claim back 25p in personal tax relief.
“This is one of those examples where in giving you receive,” says Charles Calkin, partner and financial planner at James Hambro & Partners. “If you are a 45 per cent taxpayer giving £1,000 to a charity, the charity gets £1,250 and you can claim back £312.50 or knock it off your income tax bill for the year. It means a £1,250 donation has actually cost you just £687.50.”
Mr Calkin points out that for those people whose earnings take them into the £100,000 to £123,700 bracket, gift aiding can be particularly helpful. For every £2 you earn in this bracket you lose £1 of your tax-free personal allowance. This is on top of paying 40 per cent income tax. The effect is a marginal tax rate of 60 per cent. “Many of our clients in this position will give money earned over £100,000 to charity so as not to be dragged into this pernicious tax rate,” says Mr Calkin.
2 Share giving
Share giving is a little-known way to give to charity but is very tax efficient. People can give shares directly to charity as long as they are listed on a recognised stock exchange. Donors will get full tax relief on any capital gains tax. They can also claim income tax relief on the fair market value of shares.
Say you bought 1,000 shares in Apple Inc in July 1981, when they were worth as little as 21 cents each, costing you $210. Today they are priced at over $176 each, meaning that your holding is worth at least $175,000. Selling qualifying shares could incur a 20 per cent capital gains tax (CGT) cost of more than £27,000. If you transfer the shares to a charity, it can exploit its tax-sheltered status to sell them free of CGT.
“The charity does not get the 25 per cent uplift that it gets from cash donations, but it avoids having to pay any CGT, and so does the donor,” says Mr Calkin. “You can offset the value of the donation against your income tax bill. Gifts of shares and property resulted in £70m of tax reliefs for individuals in the last financial year.”
3 Leaving a legacy
People often leave charitable gifts in their wills. This reduces the amount of inheritance tax that will need to be paid on their estate. Those giving away 10 per cent of their net estate will reduce the rate of inheritance tax they would have to pay on the remainder of the estate from 40 per cent to 36 per cent.
Mr Calkin says the effect of this is that those who were already planning to gift between 4 per cent and 10 per cent of their net estate to charity will actually leave their beneficiaries better off by lifting this to the full 10 per cent. “Others who were not planning charitable gifts might be encouraged to think again when they see the difference this makes,” he says.
For example an estate with a net value of £250,000, might incur an IHT charge of £100,000, leaving your beneficiaries with £150,000. If you give away 10 per cent of the estate — £25,000 — the IHT charge on the remaining estate (£225,000) is reduced to £81,000, leaving your beneficiaries with £144,000. In other words, you have given £25,000 to charity but it has cost your other beneficiaries just £6,000.
4 Giving land and property
Giving land and property direct to charity is another option. These gifts are exempt from CGT and IHT while income tax relief can be claimed on the value of the gift.
“The charity may ask you to sell these assets and give them the proceeds, but as long as you keep records of this request and your subsequent donation, you won’t have to pay CGT,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown. “The other advantage of making this kind of gift is that the value of what you give away will be deducted from your income when your annual tax bill is calculated.”
5 Charity accounts and credit cards
A number of charitable organisations offer accounts which help donors better organise their giving. Customers can track their donations, plan their giving, easily split donations across causes, give from their payroll and ensure the charity receives any Gift Aid benefit. Charity accounts also make it possible to give anonymously. You sign a single Gift Aid declaration form and then transfer funds to your new account.
Charity credit cards allow consumers to give while they spend. These are available from a variety of card providers and have a typical gift value of 0.25 per cent of spending. This means that for every £100 spent 25p will go to charity.
6 Giving using direct debit
Direct debit is a convenient way to give and is used by nearly a third of all donors, according to CAF. This method can help with planning charity giving and ensures that any Gift Aid owed on the donation can be reclaimed by the charity.
7 Charity Christmas cards
According to the Charity Commission, the most popular way to support a good cause at the festive season is to send charity Christmas cards, with charities making an estimated £50m from cards each year.
However, CAF points out that there is sometimes a discrepancy between the cost of cards and how much is given to the charities themselves. For example, Aldi gives 25 per cent of profits from charity Christmas cards to Teenage Cancer Trust, while Asda donates about 10 per cent per pack to Children in Need, according to CAF. Other donations from retailers include Next which donates 15 per cent of card sales to Make-A-Wish and Barnardo’s; and WH Smith, which splits 10 per cent of the revenue from card sales between Cancer Research UK, Mind and the National Literacy Trust.
Klara Kozlov, head of corporate clients at CAF, says “Many retailers sell charity Christmas cards and in the process, raise a significant amount of money for charities across a range of cause areas. Many British people are at their most generous during the festive period . . . for many people, the convenience of buying a set of charity cards and knowing that a portion of that purchase will help those in need is a strong motivation to do good.”
Ms Coles recommends sending a charity e-card instead. “In some cases you have to make a donation to send them, but using an e-card means 100 per cent of your donation goes to charity — and you can donate the money you would have otherwise spent on stamps too.
8 Give as you earn
People can also donate to charities directly from their pay — known as payroll giving. Signing up means people can give directly to nominated charities from their pay before tax is deducted. This is a very tax-efficient way of giving as tax relief is at its highest rate. Donating £1 using this method would only cost a basic rate taxpayer 80p.
Also, if you receive a company or personal pension and your provider deducts tax through PAYE — and your pension provider runs a payroll giving scheme — you can donate to charity by authorising them to make the donation from your pension before deducting tax.
9 Donating to a charity shop
Another popular way of helping charities is through donating clothes, books, CDs and other unwanted items to charity shops. Donors can also sign a Gift Aid declaration when they do this, meaning that the amount raised through their donation is topped up.
A recent CAF survey found that weird and wonderful items donated to charity shops have included a stuffed bison and a live hand grenade.
Ms Coles says: “It’s the gift that keeps on giving. By clearing out unwanted clothes, toys and books, not only do you make space for this year’s presents, but you ensure that charity shops are stocked with affordable gifts in time for Christmas, and you raise vital money for a charity you believe in — so everyone benefits.”
10 Give as you spend
There are charitable giving websites such as Give as you Live and Easyfundraising that work like cashback sites, but give a proportion of your spending to charity. Individuals can register with a specific charity and then click the links from the fundraising site to thousands of retailers, and shop as normal. A percentage of everything spent will then be donated to the charity. People can also download a donation reminder, so whenever they shop, he or she will be prompted to do so through the fundraising site.
“You can add to your donations without spending any extra,” says Ms Coles. “Some sites have bonuses for referring a friend. Others will offer a donation simply if you compare utility, mobile or insurance deals.”
The charity raffle was the UK’s favourite way to help raise money for good causes in 2017, according to research published by CAF. It also revealed that more than 9m people in the UK have taken part in a running event to raise money for charity.
But fundraising platforms such as JustGiving have come in for criticism in recent months over opaque fee structures. In October, JustGiving announced that its 24m customers would be able to use the personal crowdfunding service without paying “platform fees”. The changes also mean the removal of fees for money raised following major incidents including acts of terrorism and natural disasters.
12 Set up a charity
Foundations can be appropriate for wealthy individuals who want to create a strong culture of giving as they give families freedom to decide where funds are allocated. Dominic Ribet, private wealth solicitor at Cripps Pemberton Greenish, says setting up a foundation often has much to do with a “sense of involvement and control” for donors, but due to the costs involved they tend to be more useful for people with more than £1m to give away.
For those donating at least five figures, donor-advised funds (Dafs) can be a better way of donating money while keeping control over where it is distributed. These allow donors to instruct the host of the fund when and how much to distribute to chosen charities.
“Many people want to see where their money will be spent,” says Dominic Ribet, private wealth solicitor at Cripps Pemberton Greenish. “And with big charities you don’t get the personal involvement that some people want.”
Dafs allow philanthropists to make a contribution and receive the tax deduction immediately. They do not have to disburse the funds to charities until later.
They are a form of a “charitable savings account”, providing an alternative for the wealthy who want to give but do not want the burden of founding and running a charity or foundation. Administered by a third party, donors can access tax relief at the point of donating money to the fund, which is then irrevocably earmarked for charitable purposes, meaning that the money cannot be withdrawn once it is in the Daf.
For any who, after considering all this, may still be prevaricating over their decision to give, it is worth recalling the words of Sir Winston Churchill: “We make a living by what we get. We make a life by what we give.”
Support Habitat for Humanity
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