Tax efficient giving

Various tax incentives are available to individuals to encourage giving to charity. These incentives provide opportunities for UK tax payers to structure charitable giving in a way which both saves tax and maximises the value of donations for recipient charities.

This guide offers general information on some of the options open to you. We then recommend that you seek independent financial advice tailored to your circumstances before committing to a donation.

Gift Aid

The Gift Aid scheme allows charities to claim basic rate tax of 20% on your donation. For example, if you donated £100 to the Woodland Trust and we were able to claim Gift Aid, the value of your donation would rise to £125.

Tax relief is also available to UK donors paying higher rates of income tax (40% or 45% for tax year 2023/24). This enables you to reclaim the difference between the basic rate and the highest rate of tax on the gross value of your gift via your self-assessment tax return. If you do not fill in a self-assessment tax return, you can obtain your tax relief by calling HMRC on 0300 200 3300 and having your tax code amended. You can then either keep any money reclaimed or donate it back to the charity.

Donating directly out of your salary

Payroll Giving is a tax efficient donation scheme offered by some employers. It allows charitable donations to be deducted from your monthly salary after the deduction of National Insurance but before the deduction of income tax. These donations are then paid over to a UK charity of your choosing.

When you donate through Payroll Giving, you receive tax relief on your donation immediately. This means that the actual cost to you depends upon the rate at which you are taxed. To donate £1, a basic rate taxpayer pays 80p.

The same donation would cost higher rate taxpayers 60p (or 55p for additional rate taxpayers). The tax you would have paid on your donation is also given to the charity. Note that these amounts will differ in Scotland.

Donating shares

Ordinarily, where there is a gain on a disposal of shares above the annual exemption (£6,000 in the tax year 2023/24, reducing to £3,000 from April 2024), capital gains tax will be payable on the gain even if they are given away to someone other than a spouse. When donating shares to charity, however, no capital gains tax is payable by you, provided there is an exchange of letters between yourself and the charity stating that the shares are to be donated to the charity, and that the charity is happy to accept them in order for the relief to be given. Proper records must be kept, such as:

• legal documents showing the transfer of the shares to charity
• documents where the charity asks you to sell the shares on their behalf.

In addition to the capital gains tax exemption, there is also income tax relief available on the value of the shares.

Donating property

The sale of your main residence is free from capital gains tax. However, second homes are taxable on the gain (the difference between the sale proceeds and the cost of the property when it was acquired). Capital gains on second homes is charged for higher rate taxpayers at 28%.

The rate is less straightforward for basic rate taxpayers. Depending upon circumstances, the rate of capital gains tax will be either 10% for other gains and 18% for residential property, or 20% for other gains and 28% for residential property.

By donating your second home to charity, no capital gains tax arises. This too depends upon the exchange of letters offering the gift to charity and the charity accepting the gift.

From 27 October 2021, the capital gains tax due on the gain from the disposal of a second home or buy to let property must be notified and paid to HMRC within 60 days of the sale.

Inheritance tax

No inheritance tax is due on legacies left to friends or family below the nil rate band of £325,000. If a property left in a will is a main residence and is bequeathed to a direct descendant, an additional nil rate band of £175,000 applies (accurate as of tax year 2023/24).

Property given to charity does not count towards the total taxable value of the estate. Where at least 10% of the estate is gifted to charity, the rate of inheritance tax falls from 40% to 36%.

Other conditions apply

If your estate is worth over £2 million, the residence nil-rate band will be tapered. For every £2 your estate is over £2 million, the residence nil-rate band will decrease by £1. That means that at £2,350,000 your residence nil-rate band will be zero.