Nobody can take their wealth with them when they die which makes inheritance tax planning essential, particularly if you have people or charitable causes you’d like to benefit.
When you die and your estate is worth more than £325,000, inheritance tax might apply at 40% on the amount above that threshold. It can also apply at tapered rates on some lifetime gifts, if you die within seven years of making a gift.
If your estate is worth more than £325,000, not including the family home, leaving part of your estate to charity has the potential to reduce your inheritance tax rate.
Paying a reduced rate of inheritance tax ensures more of your estate is passed on to the people and causes which are closest to your heart. The earlier you start planning, the better.
The benefits of Gift Aid
If you make a personal donation, you usually have the option to make a Gift Aid declaration. This enables charities and community amateur sports clubs to claim an extra 25p in every £1 you give.
The benefit of Gift Aid is to the charity, rather than to you if you’re a basic-rate taxpayer. If you’re a higher or additional-rate taxpayer, you can get some extra tax relief, too, but you will have to claim it from HMRC via self-assessment tax returns.
For example, if you’re a higher-rate taxpayer and you donate £500 to charity, the charity claims Gift Aid to make your donation £625. You pay income tax at 40%, so you can personally claim back £125 (£625 x 20%).
Donations will not qualify for Gift Aid if they’re more than four times what you have paid in income tax and/or capital gains tax in the previous tax year.
The seven-year rule
If you make gifts during your lifetime, they might be treated as potentially-exempt transfers. This means they could be exempt from inheritance tax, depending on how long you live after making the transfer.
Dying within a seven-year period will result in the beneficiary having an inheritance tax liability. As a rule of thumb, the longer you live, the bigger the inheritance tax exemption.
We refer to this as “taper relief” and it operates as follows:
- less than 3 years – 40%
- 3 to 4 years – 32%
- 4 to 5 years – 24%
- 5 to 6 years – 16%
- 6 to 7 years – 8%
- 7 or more years – tax-free.
Corporation tax & gifts
If you run an incorporated business, it’s possible to lower your corporation tax bill if you gift money, equipment and trading stock, land, property and shares, seconding employees, or if you sponsor a charity.
The following reliefs are in place to reduce your company’s profits:
- money – fully deductible, assuming certain conditions are met
- equipment and stock – full capital allowance is available
- land, property and shares – no capital gains tax liability, while the market value is deductible from your company’s total taxable profits
- secondments – your company must continue to pay the employee and run PAYE on their salary. You can set the costs against your taxable profits as if they were still working for you.
Some of these benefits are not available if your company makes gifts to community amateur sports clubs. But generally, reducing your company’s total taxable profits via charitable contributions will reduce your exposure to corporation tax.
Tax relief on gifts to charity
Individuals and companies can claim tax relief on certain types of investment, and land or buildings, that are given or sold at less than market value to a UK charity in certain circumstances.
Qualifying investments include:
- shares or securities listed on a recognised stock exchange, or dealt in on certain UK markets (AIM and PLUS are the only two for now)
- units in an authorised trust
- shares in an open-ended investment company based in the UK.
If you’re gifting land or buildings, the charity must be willing to accept the gift – you can’t just dump a run-down building on them and walk away – and obtain a certificate from them to confirm the deal.
Over the years, plenty of people thought they’d found a loophole: what if I give my home away, claim tax relief on the gift, but keep living in the property?
It’s easy to see how that might sound tempting but no such loophole exists. To qualify for tax relief, you have to give away the whole of your ‘beneficial interest’ to qualify, but continuing to live in the house invalidates such a claim.
If you make a gift to charity that qualifies for relief, we make the deduction when we calculate your income for the tax year in which your donation occurred.
If it’s an outright gift, we usually deduct the value of the net benefit to the charity; any incidental costs, such as broker’s fees associated with the process; and add back on the value of other benefits you receive as a result of the gift, such as a thank-you present from the charity.
Unfortunately, these reliefs have been exploited in complex tax avoidance schemes over the years and so the rules have become dense with corrective clauses.
Whether you’re an individual or a company director, our tax planning service can assist when it comes to making charitable donations to potentially reduce your tax liability. Email info@jamesscott.com or call us on 0161 653 2274 to find out more.