Charitable Financial Planning – Part 1

Our two articles on charitable gifting consider the methods available when gifting money to charity, and how, by using cashflow forecasting you may be able to gift more than you expected as well as reducing the burden of tax.

Gifting money to charity to support a cause that you are passionate about can often be a very personal activity – perhaps the gift is prompted by an event that has touched the lives of you, your family or your friends.

Supporting a charity close to your heart be a very rewarding experience, but you may also benefit from some attractive tax breaks as part of your wider lifetime financial plan.

Choosing your charity

To ensure your chosen charity truly shares your values, you may want to ‘delve’ a bit deeper.

There is more to this than just looking at a charity’s accounts and executive pay. For example, you might ask:

• What is the charity’s mission or objectives and how do these reflect your desire to help a cause, drive change or make a difference in the world?
• What proportion of its expenses goes to meet running costs? Although note that low overheads don’t necessarily signify efficiency, as neither is the size of a cost base a measure of effectiveness.
• What is the charity’s views on direct action? (which isn’t always legal)!
• Are there examples of its work and achievements? This is often called an ‘Impact’ statement which some Charities publish every year. Your backing can then be better defined not by the size of the gift but by the impact it has helped to make.

Alleviate your income tax bill

If you are a UK taxpayer, Gift Aid increases the value of your charity donations by 25%, because the charity can reclaim the basic rate of tax on your gift at no extra cost to you. For example, if you donate £10,000 the charity will receive £12,500.

If you are a higher rate or additional rate tax payer, a charitable gift may help to reduce the burden of your income tax bill in the tax year that you make the gift. For example, an income tax saving of up to £2,500 (higher rate) or £3,125 (additional rate) can be made on a gift of £10,000.

Boost your pension funding

It could even boost your ability to fund your pension where restrictions on funding levels apply for higher earners. These are complex rules and your Financial Planner will be able guide you through this. As an example, in 2018 we helped one client who had gifted a large sum of money to a local charity receive a £14,000 tax refund. They were unaware of the charity’s status and hadn’t realised they could donate through Gift Aid. Upon reviewing the gift’s value and the client’s other financial matters, we were able to recatergorise the amount donated as a one-off payment to a charity and claim back the tax that had been paid.

Reduce your estate’s inheritance tax liability

The value of your estate would also be immediately reduced by the value of your lifetime gift for Inheritance Tax purposes. For example, based on a gift of £10,000 – the potential Inheritance Tax saving could be up to £4,000.

Reduce your capital gains tax liability

If you would like to speak to a qualified Financial Planner about this, or any other matter, please give us a call today on 020 7269 7960. We would love to hear from you.

Donating shares or investment funds with unrealised gains to charities can also be more tax efficient than making an equivalent donation of cash. This is because the investments can be transferred directly to your chosen charity (over and above your capital gains tax exemption). The charity would then be able to dispose of the investments free of any capital gains tax before putting the cash to good use.

To give you an example: where an investment with a value of £10,000 is transferred to a charity, and which carries a taxable gain of +£5,000, a capital gains tax saving of up to £1,000 could be made for higher rate or additional rate tax payers (or £500 for a basic rate tax payer).

Your Financial Planner will be able to discuss how charitable gifts may impact favourably on your personal tax position as part of your lifetime financial plan.

Even if reducing the amount of tax you pay isn’t your motivation, it shouldn’t be ignored. Our team of Financial Planners can guide you on selecting the most appropriate donation method to optimise your gift and benefit you and your chosen charity.

This article has been published for educational purposes only and should not be considered investment advice or an offer of any product for sale. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Tax planning and cashflow forecasting is not regulated by the Financial Conduct Authority. Tax legislation is subject to change.