Are you missing out on tax efficiency by ignoring Gift Aid and the Inheritance Tax impact of charitable donations?

Tax bills are not the only thing that is rising, as higher costs are causing problems for many businesses and individuals who need to manage their finances more carefully.

Charities are under increasing pressure to do more with less as the amount of donations received has taken a dip.

A lack of awareness of the utility of Gift Aid and the impact that donations can have on Inheritance Tax (IHT) may be causing individuals to miss out on relief while also not supporting charities.

Both individuals and charities stand to benefit from a greater awareness of how mutually beneficial donations can be.

What is Gift Aid?

Anyone in the UK who pays Income Tax or Capital Gains Tax (CGT) has the ability to enhance charitable donations through the use of Gift Aid.

Gift Aid gives charities an extra 25p for every £1 that is donated to them and this 25 per cent boost can make a notable difference in offsetting economic challenges.

Most individuals will sign a Gift Aid declaration with specific charities to ensure that donations are processed effectively.

However, there are key considerations that must be understood.

If at any time a person stops paying tax, they will no longer be eligible for Gift Aid and must update the charity immediately.

While it is good to be generous, it is not possible to donate more than four times what was paid in tax during the tax year and still have it qualify for Gift Aid.

If you are a Higher rate or Additional rate taxpayer, you can get a degree of tax relief through your engagement with Gift Aid.

The different in the tax you have paid and the amount claimed back by the charity can offset your own tax bill, meaning you can receive 20 per cent or 25 per cent back depending on your tax rate.

To manage Gift Aid, you must inform HMRC so that your tax code can be updated, or you can handle it through your Self Assessment tax return if this is how your tax is managed.

Self Assessment tax returns have the advantage of giving you access to relief much sooner, as even donations from the current year can be declared provided they were made before the filing.

Will donating to charity make me pay less Inheritance Tax?

IHT is the phantom that haunts the finances of a growing number of individuals.

Giving money to charity is an incredibly effective way of mitigating this, as gifts given to charity are not treated the same as gifts given in other contexts.

While most gifts are only IHT exempt when given more than seven years before you die and are otherwise subject to a tapered rate of tax, gifts given to charity are immediately exempt from your estate for IHT calculations.

Therefore, Gift Aid donations are entirely free from IHT considerations and should be seen as an effective, ongoing tool for tax management.

If your Will makes provisions for charity, it may be possible to reduce your overall IHT burden.

Should you donate more than 10 per cent of your estate’s value to charity, you will only pay IHT at a rate of 36 per cent rather than the standard 40 per cent on your estate.

Altruism and tax-efficiency combined in your finances

Having an accountant support you with your estate planning is more important than ever and our team can ensure you are making decisions that will help you and the good causes of charities.

In the past decade, there has been a drop in the number of donors supporting charities, with research finding that there are six million fewer donors now than in 2016.

While the cost of donating is a factor in the reduced number of donors, 28 per cent of those who do not give claim they have no interest in charity.

This rises to 49 per cent of Higher rate and Additional rate taxpayers who seem to believe that charitable donations do not benefit them.

Our team can demonstrate how charity should be a core part of your own financial and estate plans if you want to be as tax efficient as possible.

As this is one of the rare occasions where helping others also helps yourself, we hope to see more individuals embrace their altruistic spirit.

We can also support charities in managing budgets so that they can continue doing good work despite economic uncertainty.

Get in touch with our team for tailored advice on managing your tax exposure through charitable donations and other strategies.