Where a gift is made to a Charity its taken off the value of the estate and as such will reduce IHT, it could even reduce the rate of IHT on the whole estate currently by 4% (40% to 36%), click here for HMRC reduced rate calculator.
In summary, your donation will either:
be taken off the value of your estate before Inheritance Tax is calculated
reduce your Inheritance Tax rate, if 10% or more of your estate is left to charity
You can donate:
a fixed amount
an item
what’s left after other gifts have been given out
The Deed of Variation can be prepared before or after the Grant of Probate but generally in must be made within 2 years of the date of death.
FA 2010 definition of charity
Under Sch 6 Para 1 FA 2010 a charity is a body of persons or trust that:
is established for ‘charitable purposes’ only
meets the jurisdiction condition (i.e. is subject to the jurisdiction of a relevant UK court or the courts of a relevant territory)
meets the registration condition (i.e. has complied with any requirement under the applicable law to be registered), and
meets the management condition (i.e. the managers are fit and proper persons).
This definition of charity allows charities of relevant territories to qualify as charities for the purposes of UK legislation (provided the conditions above are met). Relevant territories are those in EU Member States, Iceland and Norway
Other reasons why you might need a Deed of Variation
Equalising distributions between the Beneficiaries
Including beneficiaries such as a grandchild born after the Will was created
Including someone who the Rules of Intestacy do not apply to, such as a partner or step-child
Charities need to find ways to increase their income and many will explore Trading.
The Taxes Acts provide for a limited exemption from Income Tax or Corporation Tax for the profits of trades carried on by charities. To qualify for exemption the profits must be used solely for the charitable purposes of the charity and the trade must satisfy at least 1 of the following 3 conditions, the:
trade’s a charitable trade (either primary purpose or mainly carried out by beneficiaries) or is ancillary to carrying out a primary purpose of the charity
non-charitable trading turnover falls below the charity’s small trading turnover limit
trading activity is a VAT exempt fundraising event
If a trade doesn’t satisfy 1 of the above conditions, the profits of the trade won’t be exempt from tax regardless of whether or not the profits are used for the purposes of the charity.
Primary purpose trading
A charity’s purposes are stated in its governing document (trust deed, constitution, memorandum and articles of association, etc).
Examples of such primary purpose trading include the:
provision of educational services by a school or college in return for course fees
holding of an exhibition by an art gallery or museum in return for admission fees
sale of tickets for a theatrical production staged by a theatre
provision of health-care services by a hospital in return for payment
provision of serviced residential accommodation by a residential care home in return for payment
sale of certain educational goods by an art gallery or museum
In each of these examples the charity’s carrying out an activity that’s a stated charitable purpose of the charity.
Trading which is ancillary to the carrying out of a primary purpose
Exemption from tax is also extended to other trading which, although not overtly primary purpose in nature, is ancillary to the carrying out of a primary purpose of a charity. This trading can still be said to be exercised in the course of the carrying out of a primary purpose of a charity and is, therefore, part of a primary purpose trade. Examples of trading which qualifies as primary purpose because it is ancillary to the carrying out of a primary purpose are the:
sale of relevant goods or provision of services, for the benefit of students by a school or college (text books, for example)
provision of a crèche for the children of students by a school or college in return for payment
sale of food and drink in a cafeteria to visitors to exhibits by an art gallery or museum (although sale to the general public, as opposed to exhibition visitors, is non-primary purpose trading)
sale of food and drink in a restaurant or bar to members of the audience by a theatre (although sale to the general public, as opposed to the audience, is non-primary purpose trading)
sale by able bodied staff of items produced by the disabled in a disabled workshop
sale of confectionery, toiletries and flowers to patients and their visitors by a hospital
Trading which isn’t wholly charitable trading
Under general case law charities will have only 1 trade. For some charities the trade will be a combination of a charitable trade (primary purpose or carried out by beneficiaries) and partly non-charitable trade (non-primary purpose and not carried out by beneficiaries). For example, the trade might deal in a range of goods or services only some of which are within, or ancillary to, a primary purpose. Or the trade might deal with some customers who cannot properly be regarded as beneficiaries of the charity. Examples of such trading include:
a shop in an art gallery or museum which sells a range of goods, some of which are related to a primary purpose of the charity (direct reproductions of exhibits with no other function, (therefore excluding for example, mugs and postcards), catalogues, etc), and some of which aren’t (promotional pens, mugs, tea towels, stamps, all postcards, etc)
the letting of serviced accommodation for students in term-time (primary purpose), and for tourists out of term (non-primary purpose), by a school or college
the sale of food and drink in a theatre restaurant or bar both to members of the audience (beneficiaries of the charity – ancillary) and the general public (non-beneficiaries – not ancillary)
the operation of a café by a ‘relief of the disabled’ charity where only 50% of the staff are disabled (beneficiaries) and the other 50% aren’t charitable beneficiaries
In these circumstances, the charitable part and the non-charitable part of the trade are deemed to be 2 separate trades – sections 479(2) and (3) CTA 2010 (for corporate charities) and sections 525(2) and (3) ITA 2007 (for charitable trusts) apply. The profit from the deemed charitable trade is exempt from tax, as long as it’s used for charitable purposes. The profit from the deemed non-charitable trade is taxable unless it’s exempt under the small scale trading exemption
How does the small trading exemption apply?
The small trading exemption applies to the profits of all trading activities that aren’t otherwise exempt from tax, provided the:
total turnover from all of the activities does not exceed the small scale trading annual turnover limit
total turnover exceeds the annual turnover limit, the charity had a reasonable expectation that it would not do so
profits are used solely for the purposes of the charity
Calculation of the annual turnover limit
The annual turnover limit is:
£5,000
if the turnover is greater than £5,000, 25% of the charity’s total incoming resources, subject to an overall upper limit of £50,000
Using a subsidiary trading company
You may find this useful if your charity:
makes profits on trading that’s not linked to its primary purpose
makes a profit that comes close to or is higher than the small trading tax exemption limit
wants to protect its assets from any trading losses
wants to have a separate organisation to carry out all its trading activities
Finance Bill 2017 introduces a new corporation tax deduction for contributions to grassroots sports.
From 1 April 2017 Companies will be able to make deductions for all contributions to grassroots sports through recognised sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. Sport governing bodies will be able to make deductions for all their contributions to grassroots sports.
Qualifying expenditure will be drawn quite widely and will, for example, include payments to coaches and officials. However, no payments to participators will be eligible, other than to cover the cost of travelling to competitions.
The legislation will contain similar protections to the charity and CASC legislation to ensure that payments are made for the intended purposes and to prevent payments being made for personal benefit. gov.uk
Currently, the following provisions provide a relief for CT on payments to sports clubs or in connection with sporting events:
Under section 189 of the Corporation Tax Act 2010, sporting bodies registered as charities can receive payments that can be deducted against the donating company’s CT liability.
Under section 202 of the Corporation Tax Act 2010, payments made to Community Amateur Sports Clubs (CASC) can be deducted for CT in the same way as payments to a charitable body.
Otherwise, section 54 (1) (a) of the Corporation Tax Act 2009 is likely to prevent payments being deductible for CT because they do not meet the test of being ‘wholly and exclusively for the purposes of the trade’.
Social Investment Tax Relief (SITR) came in on 6th April 2014.
Individuals making an eligible investment at any time from 6 April 2014 can deduct 30% of the cost of their investment from their income tax liability for 2014/15 (or the relevant later year in which the investment is made). The minimum period of investment is 3 years.
The income tax and capital gain tax reliefs provide a substantial incentive for investors. To make sure new investment is directed to the organisations which need it most and to meet EU regulations, the investment and the organisation receiving it must meet certain criteria.
Organisations must have a defined and regulated social purpose. Charities, community interest companies or community benefit societies carrying out a qualifying trade, with fewer than 500 employees and gross assets of no more than £15 million may be eligible.
The tax relief is available on unsecured loans as well as shares.
So basically, if you are a basic rate tax payer using SITR will be better than Gift Aid.
Not only do you get the tax relief but if you give a loan it will be repaid (after 3 years).
To maintain public confidence in the work of charities, charity law requires most charities (income over £10,000) to have an external scrutiny of their accounts. Provided a charity is not required by law or its governing document to have an audit then trustees may choose a simpler and less expensive form of external scrutiny called an independent examination.
Trustees may opt for an independent examination instead of an audit provided their charity’s gross income is not more than £500,000, or where gross income exceeds £250,000 its gross asset are not more than £3.26 million
Gift Aid donations are regarded as having basic rate tax deducted by the donor. Charities or CASCs take your donation – which is money you’ve already paid tax on – and reclaim the basic rate tax from HM Revenue & Customs (HMRC) on its ‘gross’ equivalent – the amount before basic rate tax was deducted.
Basic rate tax is 20 per cent, so this means that if you give £10 using Gift Aid, it’s worth £12.50 to the charity.
A Gift Aid declaration must include:
your full name
your home address
the name of the charity
details of your donation, and it should say that it’s a Gift Aid donation
If you pay higher rate tax, you can claim the difference between the higher rate of tax 40 and/or 45 per cent and the basic rate of tax 20 per cent on the total ‘gross’ value of your donation to the charity or CASC.
For example, if you donate £100, the total value of your donation to the charity is £125 – so you can claim back:
£25 – if you pay tax at 40 per cent (£125 × 20%)
£31.25 – if you pay tax at 45 per cent (£125 × 20%) plus (£125 × 5%)
You can make this claim on your Self Assessment tax return
If you are a higher rate tax payer donations made in 2013/14 will save tax at 45 percent, but in 2012/13 the rate was 50 per cent.
You can ask for Gift Aid donations to be treated as being paid in the previous tax year if you paid enough tax that year to cover both any Gift Aid gifts you made that year and the ones you want to backdate.
So if you want to donate now (before the end of the tax year) you could claim back extra tax by carrying it back into the previous tax year.
