With Christmas fast approaching, I thought we would consider the issue of tax-efficient giving to charities. There are reliefs for both individuals and companies whereby:
1. The donor can benefit from tax relief on either the value of a cash gift or the market value of an asset.
2. Also the donor will not trigger a taxable gain in relation to the asset which is being disposed of to the charity.
At first glance you may think that there would be little difference between selling an asset and gifting the proceeds compared to gifting assets directly to charity. For assets which are pregnant with gain this is not the case.
An investment company has shares worth £100,000 (which cost £10,000 in 2018) and it is planning on selling these and gifting the proceeds to charity. Other profits (ignoring the disposal of these shares) are estimated to be £1m for the year. If they do this then corporation tax would be payable at 19% on:
Profits of £1m + gain of £90,000 less £100,000 charitable donation = £990,000
Tax on these profits at 19% = £188,100
We should also consider what the position would be if the shares are gifted directly to the charity:
Profits of £1m less £100,000 charitable donation = £900,000 (there is no taxable gain in respect of the gift to charity)
Tax on these profits at 19% = £171,000
Therefore £17,100 of tax has been saved by gifting shares rather than gifting proceeds. In both cases the charity will end up £100,000 better off (although it will have to sell the shares in the second scenario).
Forbes Dawson view
The above example shows how it will often be more tax-efficient to gift assets rather than cash to charity. However, care needs to be taken in certain situations because there is various ‘small print’ in the rules. For example, it is not possible to gift only part of a property and get the relief (and even where there are joint owners all owners must dispose of their holding in the property). Sometimes it may be possible to get around this issue by first selling the property to the charity at under-value, following which the charity could sell it on to a third party. All aspects of such transactions would of course need to be looked into.
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