How giving to charity can help your tax position

Jan Wright, director in our private client team, looks at how your charitable giving may reduce your inheritance tax bill.

There are lots of advantages to giving to charity – not least helping others. But it can also help you.

One of the most effective ways to lower the inheritance tax bill when you die is to have gifted assets away during your lifetime. 

Lifetime gifts and regular gifts

This can be done in several ways. Perhaps the two most significant are making substantial gifts where you then survive seven years after having made the gift, or by making regular gifts where it can be shown that those gifts have been made out your surplus income. Such regular gifts are then considered exempt even if you do not survive the seven years after they have been made.

As mentioned you do need to show that such gifts are made out of surplus income. It is therefore worth noting the effect of making gifts to charity when wanting to claim this exemption.

Gifting assets to charity

When you gift assets such as shares or land to charity, you do not need to pay the capital gains tax that may otherwise be due on that transfer. Another tax consequence – and of relevance when claiming the regular gifts out of surplus income exemption – is that the market value of the assets gifted to charity can be set against your income for income tax purposes. This has the effect of reducing your income tax bill – and note you must deduct the value of your donation from your total taxable income for the tax year in which the gift was made.

Of arguably more importance is that, although this gift of capital has the effect of reducing your income for income tax purposes because it is a gift of capital, it will not reduce the level of income which you receive (other than by the actual income, if any, which was generated by the capital you have gifted). 

Therefore, if you are also looking at inheritance tax planning, the total level of income which you have received (even though you have now paid less tax on it) is still the level of income which is relevant when calculating any surplus income that you have. Thus, any gifts you can make which can be considered regular gifts out of that surplus income do not fall into your estate for inheritance tax purposes, even if you die within seven years of making that gift. A rare case of being able to have your tax cake and eat it!

As always, it’s imperative to take clear professional advice on how your charitable giving, and any gifts made in your will, may affect your tax position.

For more information on this topic, or any other private client matter, contact Jan Wright on 01539 628042.