Client Affairs

Giving Shares to Charity is More Tax Efficient

Tim Gregory, Saffery Champness, Partner, 8 December 2006

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With Christmas approaching, many high net worth individuals will be considering donating cash to charity. According to the UK’s Charities Ai...

With Christmas approaching, many high net worth individuals will be considering donating cash to charity. According to the UK’s Charities Aid Foundation, around 70 per cent of people in the UK donate money to charity every year, totalling around £7.5 billion.

However, few people realise that gift aid relief, which is available on cash donations, also applies to the donation of shares. Indeed, giving away shares can be more tax efficient than cash, particularly for higher rate taxpayers, and does not reduce the value of the gift to the charity.

As well as claiming Gift Aid on the value of the shares at their highest tax rate, taxpayers can also prevent any capital gains tax charge arising on the shares.

So what are the tax implications of donating shares to charity in the UK? First, the Gift Aid scheme allows a basic-rate tax reclaim (22 per cent) on your donation from the government. This applies to shares and many other assets as well as cash donations, although the claim is made by the individual in relation to donations other than cash.

Under the scheme, higher rate tax payers can also claim higher rate tax relief on their donation. For example, a payment to a charity of £7,800 cash leads to the charity receiving £10,000 in total (includes £2,200 basic rate relief), but the donation only costs you a net £6,000 (less £1,800 higher rate relief).

Now, assume an individual who is a higher rate UK taxpayer has shares currently worth £7,800 that were bought for £4,000 three years ago. The capital gains tax due on selling those shares would be £1,444 (assuming no annual exemption is available and higher rate tax applies).

If the shares were donated to charity instead of cash, the donor would claim his or her full 40% tax relief (£3,120), and could then give sufficient of that cash (£1,716) to the charity so that, together with its basic rate claim on the cash, it would still have received a total donation (shares plus cash plus tax relief) of the full £10,000, and the charity would not have to pay tax on the eventual sale of shares. The donor would also then be able to claim higher rate tax relief on this cash donation (£396), making a net cost to the individual of (£7800-£3120+£1716-£396) the same £6,000.

In addition, the donor would escape a CGT liability of £1,444. Instead of a net cost to the donor of £6,000, the total effective cost of the charity receiving £10,000 is only £4,556. Crucially, although the capital gain transfers to the charity, the charity does not pay tax and so it has no tax to pay on the gain. This operates most effectively where there is a large CGT liability on the shares concerned.

In this way, donating shares to charity can be far more tax efficient than donating cash, without reducing the total amount received by the charity.

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