Gifting to charity (other than Gift Aid!)
We had one of those instances in the office this week where two people came in to the office on the same day asking to discuss exactly the same thing, gifting shares to charity. The proverbial two buses at once.
HMRC treat the gifting away of shares and any other assets as a disposal for Capital Gains Tax purposes and tax the gift as though the asset had actually been sold for its full market value; but gifting an asset to charity is different, usually HMRC will not look to tax the gift. Simple and straight forward you might think, but there is a subtle planning point you might want to look out for.
The market value of the shares to be gifted to charity in the first case were more than the owner had originally paid for them, hence they were standing at a gain. As mentioned above, HMRC would usually look to charge capital gains tax on that increase in value but because they were gifted to charity there was no tax to pay. The client was happy that there was no tax to pay, and the charity immediately sold the shares to get the money.
Now compare the above situation with the second case. This time, the market value of the shares about to be gifted were less than the owner had paid for them, so they were standing at a capital loss. In this situation the owner was actually better off by selling the shares and then gifting the cash proceeds to the charity. By selling the shares himself, he had made himself liable for any tax but as the shares were standing at a loss the owner had crystallised a capital loss which he then used to offset against other chargeable gains.
So in the second situation, the charity received the same amount, albeit in cash rather than shares (they usually immediately sell any shares they receive), but our client had saved 28% capital gains tax. So, as ever, the moral is to check beforehand. If the first case had of sold the shares himself then he would have paid capital gains tax on the gain, and if the second case had merely gifted the shares then he wouldn’t have been able to use the loss leaving himself with more capital gains tax to pay!
Whilst talking about gifting to charity it would be remiss to not mention the inheritance tax implications of leaving gifts to charity in your will, especially given the favourable tax rate available.
It is fairly common knowledge these days that if someone leaves at least 10% of the estate to charity then the tax rate on the remaining estate is reduced to 36% from 40%. A 4% saving might not seem much but if it means your family pay less inheritance tax then that 4% can represent quite a saving.
So let’s consider the scenario of a gentleman who has recently passed away and he has left an amount in his will to be given to charity. The tax legislation allows his other beneficiaries to decide to pay more of his estate to charity than was written in the will, and in certain circumstances this means his beneficiaries actually receive even more than they might have done. If someone has left just below 10% of their estate to charity, then 40% inheritance tax will be paid on the rest of the estate, but if that gift to charity is increased just a little, enough to meet the required 10%, then the whole of the remaining estate is taxed at the lower 36%.
Simple maths to prove a point… Say the beneficiaries are to receive £50,000, after 40% tax that leaves £30,000 for the beneficiaries. But if by leaving an extra £500 to charity it means the remaining estate is taxed at 36% then… £49,500 after 36% tax leaves £31,680. So in this example leaving £500 to charity means an extra £1,680 for the beneficiaries.
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