The best ways to give to charity – and enjoy ‘double tax relief’

Britain is famous for the scale of its charitable giving – but many of us are doing it wrong, short-changing ourselves and also our favourite charities. Giving efficiently can even result in “double tax relief”, according to experts.

For most people, our charitable giving consists of a monthly direct debit to our chosen cause, possibly with some ad hoc donations to one-off fundraisers or appeals. However, for some it is a more significant consideration.

Charitable giving is an increasingly popular topic for people to ask wealth managers and financial advisers to manage. 

The super-rich are using “donor-advised funds” to keep control of what happens to their donations – but there is plenty those with more modest sums to give can do, too.

Telegraph Money has taken a look at the options for charitable giving to help you find the right option for you.

What are the main ways to give to charity?

There is no best way to give to charity in the UK, the route you choose will likely depend on your ambitions for your giving and the amounts you are looking to donate. Each option comes with pros and cons.

Direct debits: popular but flawed

Direct debit is the most popular form of charitable giving in the UK with 31pc of donations made this way, according to London & Zurich, a payment clearing firm, with a total of £1.1bn. 

Most charities offer the option to set up a regular transfer via your bank account that can be cancelled at any time.

However, while there is obvious ease in setting up a direct debit, and similarly a standing order, it may not be the best way if you want to donate significant sums to charity, and will not work if you want to donate non-traditional assets or have specific goals in mind for your giving.

Gift aid

Established in the 1990s the Gift Aid scheme enables charities to claim the tax you have paid on the donated money from the government, as long as you are a UK taxpayer.

It is charged at the basic rate of tax, topping up donations by 25pc. If you haven’t paid enough tax to cover the gift aid donation you will owe the outstanding balance to HMRC.

So if you donate £100, the charity will receive £125 overall and you can then claim £25 back in your tax return and as a result your donation will cost you £75.

However, there are ways to give more to charity. If instead of £100 you increase your donation to £125, the charity receives a total of £156.25 thanks to Gift Aid. 

As the donor you can claim £31.25 back reducing your giving to £93.75 – still less than your original intended gift of £100.

If you are a higher-rate, 40pc, or top-rate, 45pc, taxpayer then you are eligible for even more tax relief. For example, if you pay an additional rate of 45pc tax you could claim back £31.20 from a £100 donation. 

The gift aid the charity receives remains at the basic-rate.

“If you are a higher-rate or additional rate taxpayer, you can also claim back the difference between your rate and the basic rate of tax on your donation through your tax return,” said David Denton, technical consultant at Quilter Cheviot.

“Of course, income tax needs to be paid by the taxpayer for the Gift Aid tax break to apply, so is unlikely to apply to large scale personal giving of wealth.”

Legacy giving

Another popular method of giving is through your will, leaving a legacy gift to a designated charity. In total £1.7bn was donated to charity by 10,100 people through their wills in 2018-19, according to private wealth law firm Boodle Hatfield.

“Clients want to ensure, firstly, that they are able to meet their own financial needs throughout their lifetime and, secondly, that they are able to leave a legacy for their family,”  explained Megan Jenkins, a financial adviser at wealth management service Saltus.

“Once these priorities have been assured, they will look at charitable giving.”

Giving to charity can also cut your inheritance tax bill. Death duty is charged at 40pc and is usually payable when an estate is worth more than £325,000. 

This can be increased to £500,000 where passing on a main home to a direct descendant.

If 10pc or more of your estate is left to charity in your will then you reduce your inheritance tax rate from 40pc to 36pc.

Alexandra Loydon, private client director at St. James’s Place, said: “A lot of people gift out of surplus income when in fact they could use that exemption to gift assets into trust for non-exempt beneficiaries such as family members and use other assets, that have grown a lot or are subject to income tax, to benefit charities and claim the tax relief.

“This is essentially double relief if you’re wanting to do inheritance tax planning.”

Placing assets into a designated charitable vehicle – such as a donor-advised fund – to appreciate during your lifetime means you can claim back tax on the donation, which are then exempt from your estate for the purposes of inheritance tax later on.

Giving with non-cash assets

Legacy giving also allows you to donate assets other than cash which would otherwise form part of your estate. Donating interests in land, whether owned leasehold or freehold, the giving of publicly listed shares, or shares in open-ended investment companies, sometimes called “Oeics”, are all eligible for tax relief via income tax relief in the year of donation.

These assets would usually give rise to a capital gains tax charge on disposal, however gifts to registered charities are exempt from capital gains tax.

However, this is an area where the UK rules are less generous than other countries. Compared to the US the list of assets eligible for tax relief once donated is limited. 

For example, donors in the US can receive the same tax benefits from donating privately held stock, private equity holdings or even more complex assets such as derivatives contracts to charity.

There are also more options in America for how you give. There is an array of vehicles on offer such as a “charitable lead” trust that allows you to provide charities with a stream of payments for a specified term.

The way philanthropy is discussed in the UK is also different across the Atlantic, said the National Philanthropic Trust UK.  “In general, wealth and taxes are not discussed as openly in the UK as they are in the US – both in polite society and with advisers”, it said.

“Although the current regime of income tax incentives was put in place for gifts of cash in 1990 and for gifts of shares in 2000, integrating charitable giving into wealth and tax planning is not yet as common in the UK as it is in the US.”

Donor-advised fund

However, there have been some useful imports from America in the charitable giving space.

One option for holding assets you plan to give to charity is to place them in a donor-advised fund, known as a DAF.

With a DAF donors pay into their own account, which allows them to allocate funds for charitable purposes that fall under the umbrella of the DAF.

The DAF itself is a legally registered charity, and the legal owner of all funds under its management. 

When someone makes a donation, it goes into their own sub-account and they decide where and when the funds are allocated – as long as their wishes are in line with UK charity law.

The assets do not have to be donated straight away and can be placed under asset management strategies to increase their value. 

However, once they are donated you can claim back the tax relief as they become legally owned by the DAF and by law must be given for charitable purposes.

For non-cash assets, such as shares that are still eligible for tax relief, any income gained from the asset will be given to the DAF and exempt from capital gains tax resulting in more money ultimately going to your chosen causes.

DAFs are popular with ultra-high net worth individuals (those worth more than $50m) as a way to carry out their philanthropy without the hassle of setting up their own charitable trust or foundation. 

However, the downside is that as funds are then donated to a charity you are unlikely to have any say over how they are used.

For those with specific goals for their money or who want a say over exactly how it is allocated, a better option may be to set up their own trust or charitable foundation.

“For those with considerable wealth looking for a structured approach to giving, charitable foundation or trusts are a favoured choice, ensuring both a lasting impact and a degree of control over philanthropic activities,” said Mr Denton. 

Setting up your own charity

Almost two thirds of ultra-high net worth individuals and high-net worth individuals (59pc) have their own foundation or charity, according to accountancy and consulting firm Mazars. 

Even more, 69pc, say they are interested to know more about the purpose and ethics of the causes they support.

“In most scenarios, individuals and families who set up a charity or charitable foundation do so because it is a rewarding endeavour and they wish to leave a legacy that will outlive them.

“Often just as important is that it gives the donor the chance to be involved in the charity and offers a greater amount of control as to how the funds are put to use and the causes they will benefit,” said Robert Barwise-Carr, Tax Director at Mazars.

Setting up your own charity is a significant undertaking and should only be done if you are prepared to commit enough time and resources to it.

Harry Bell, director of financial planning at Charles Stanley, said: “From a financial planning perspective, one of the most important things to consider when setting up a charitable foundation is ensuring that the amount set aside is appropriate.

“Clients need to ensure they don’t overgift at the expense of their own income requirements, so a little bit of stress testing or modelling is needed. You can always give more at a later date.”

It is also worth ensuring that a charitable organisation is the right option for what you want to achieve. In some instances it may make more sense to use a not-for-profit or social enterprise structure.

Before you get too far ahead with your planning, make sure that there isn’t already an established charity carrying out the work you want to do and that your mission falls under the legal definition of a charity.

It is also worth noting that it is not something you can do alone. To set up a charity you usually need at least three trustees who will be responsible for the organisation and can show they understand the legal responsibilities of the role. 

All applications to set up new charities must be approved by the Charity Commission in order to receive the correct tax benefits by HMRC.