John Canady describes the philosophy behind philanthropy in the UK.
As we approach the end of the year and the traditional holiday ‘giving season’, many of us will take a look at our charitable giving and how we might help those less fortunate. For global citizens who make the UK their home, understanding the specifics of tax-efficient giving in the UK can be important. Here are the top five things to consider:
- In the UK, there are tax incentives for donations of cash, publicly-listed shares, and property.
This is a narrower range of available tax incentives than in some other countries. In the US, for example, income tax incentives are also available for donations of more illiquid assets, such as closely-held or privately-held stock, alternative investments (private equity, hedge funds), privately held interests, C-corporation tax liability, S-corporation (share-holder tax liability), LLCs, structured notes, derivatives, and publicly traded partnerships.
- Gift Aid is the UK’s unique system to provide tax incentives for ‘cash’ donations (i.e. not shares or property).
In many countries, the donor receives the entire tax benefit for a donation. In the US, the donor claims 100 per cent of the value of a donation as a deduction (tax relief) to reduce taxable income, up to applicable annual limits. In the UK, cash donations are treated differently. The donor and the charity effectively split the tax incentives through the UK’s Gift Aid tax incentive scheme. For example, if you are an additional rate taxpayer and make a £100 donation, you could claim tax relief of £31.25 on your Self Assessment return and the charity would receive £25 in reclaimed Gift Aid directly from HMRC.
- The UK does not limit the amount of income tax relief you may claim for charitable giving.
Many countries place limits on the amount of income tax credit you can receive for charitable giving. For example, the US limits income tax deductions to 50 per cent of your adjusted gross income for donations to public charities and 30 per cent for donations to private foundations. The UK does not have any limits. You could offset 100 per cent of your taxable income through charitable giving.
- Charitable giving can lower your inheritance or estate tax.
In the UK, inheritance tax starts for estates valued over £325,000 compared to $5.3 million in the US. If you leave at least 10 per cent of your estate to charity in the UK, the inheritance tax rate is reduced from 40 per cent to 36 per cent.
- Giving today builds on the great British tradition of philanthropy.
Philanthropy in the UK dates back over 900 years. The oldest endowment still in operation today was established in the 11th century in London. Legacy and lifetime giving emerged in Britain on a significant scale in the 17th and early 18th century. The 18th century even saw the emergence of innovative forms of philanthropy – what we might call ‘impact investing’ or ‘social investment’ today. Nineteenth century Victorian philanthropists became famous for the large scale investment in infrastructure and cultural institutions. Although the twentieth century saw the rise of the post-war welfare state and a decline of large scale public philanthropy, the need for philanthropy is again on the rise in the UK.
John Canady is CEO of National Philanthropic Trust UK which provides donor-advised funds and other charitable giving vehicles that are tax-effective in the UK and US.