Some people obtain sponsorship to grow magnificent moustaches for “Movember”; others leave legacies in their wills. There are lots of different ways of giving cash to charity.
People will often also willingly pile their unwanted Christmas gifts into a bag and take them down to their local charity shop.
But what about more substantial non-cash assets?
Happily, for those considering giving shares, or land and buildings to charity during their lifetimes, there are attractive income tax (IT) and capital gains tax (CGT) reliefs available, in addition to the Inheritance Tax exemption.
IT relief may be available when an individual makes an outright gift of shares, land or buildings to charity, or sells these types of assets to a charity for less than their market value.
In order to qualify for the relief, the donor must have an income tax liability for the tax year in which the asset is being given to charity; this type of income tax relief cannot be carried backward or forward.
The following conditions must be met for the relief to be obtained:
- The type of asset being given must qualify for the relief
The type of shares that can be given in order for the relief to apply must be one of the following:
- Shares or securities that are listed on any recognised stock exchange. This includes London and Plus Listed in the UK and any recognised overseas stock exchange.
- Shares or securities dealt in on any designated market in the UK. The only markets so designated currently are the Alternative Investment Market (AIM) of the London Stock Exchange and the PLUS-Quoted market of PLUS Markets.
- Units in an Authorised Unit Trust (AUT).
- Shares in a UK Open-Ended Investment Company (OEIC).
- Holdings in certain foreign collective investment schemes - generally schemes set up outside the UK that are similar to AUTs and OEICs.
In relation to land and buildings, a "qualifying interest" in land in the UK, meaning a freehold or leasehold interest in land, must be given.
It is the whole qualifying interest that must be given away. This means that if two people own a property jointly, then they will both have to dispose of their interest at the same time in order to transfer a qualifying interest to the charity. Similarly, an individual cannot transfer land and continue to live on that land; the whole of his or her interest must be transferred.
- The transfer must be an outright gift or a sale an undervalue
Once the donor has established the type of asset that is going to be given to charity qualifies for the relief, he can consider whether the asset is going to be given as an outright gift (that is, for no consideration at all) or sold to the charity for less than the market value. “Market value” is defined by the Revenue as the price that the asset might reasonably be expected to sell for in an open market.
If the individual makes an outright gift of the asset, the calculation for the relief is based on:
- The total value of the asset at the time of the transfer,
- plus any incidental costs of disposal,
- less any money or other benefit given to the individual (or connected person) by the charity.
- Fred wants to give a property worth £200,000 to a particular charity.
- The professional costs incurred in transferring the property to the charity come to £500.
- The total value of the gift to the charity is therefore £200,500.
- This means that Fred can deduct £200,500 from his income tax liability for the tax year in which the transfer is made to the charity.
- Fred decides to sell the property worth £200,000 to the charity for less than the market value – for £50,000.
- The professional costs incurred in transferring the property to the charity still come to £500.
- The total value of the gift to the charity is the sum of the property's value and the incidental costs of disposal (coming to £200,500), less the proceeds of sale received from the charity (£50,000).
- This means that Fred can deduct £150,500 from his income tax liability for the tax year in which the transfer is made to the charity.
CGT relief is available on a gift of any asset other than cash to a charity. If an individual gives shares, land or buildings to a charity as an outright gift or for less than it cost to purchase the asset in question, then he is treated as making no gain or loss in respect of that disposal.
However, if the individual sells the asset to a charity for less than the market value but more than the asset cost him in the first place, then CGT will be payable in respect of the difference between the purchase price and selling price, subject to the deduction of allowable costs.
- Steven purchases a property for £300,000.
- He subsequently spends £20,000 on improvements.
- The market value of the property, after these improvements, rises to £350,000.
- Steven then sells the property to a charity for £325,000.
- The difference between the purchase price and sale price (Steven's chargeable gain) is £25,000.
- However, the £20,000 spent on improvements is classed as an allowable cost.
- This means that Steven will only have CGT to pay in respect of the remaining £5,000.
If considering a gift of shares or land, always talk to the recipient charity first to make sure it is able to accept the gift! Most probably can, but some smaller charities might not be able to do so.
If the charity can't accept the gift itself, that need not be the end of your philanthropic impulse. The charity may ask you to sell the item on its behalf, and donate the proceeds of sale. Provided you get this instruction in writing from the charity, you should still be able to claim the available reliefs, even though the asset is still in your hands when sold.