How Gift Aid Works

There has been a lot of coverage in the press recently about tax relief for charitable donations.

When you make a donation to a charity or to a community amateur sports club you can make a declaration that your donation is made under Gift Aid. This declaration can be made in writing, online or over the phone, but in all cases it should include your name and address details, the name of the recipient charity, and a statement that you have paid sufficient UK tax to cover the 20% tax the charity will reclaim from the Tax Office.

Say you make a donation of £1,000 to a charity, and make a Gift Aid declaration for that gift. This results in a gift of £1,250 in the charity's hands as they can reclaim basic rate tax (20%) on the gross equivalent of the gift. In this example, 20/80 x £1,000 = £250.

You have to declare with your gift aid declaration that you have paid at least £250 in UK income tax or capital gains tax in the tax year in which you make the gift.

If you pay tax at 40% or 50%, the thresholds at which those higher rates are imposed are extended by the gross value of your gift, which gives you additional tax relief for your gift. For example, the 40% threshold is currently £34,370, so if you make donations under gift aid that total £1,000, these are treated as gross gifts of £1,250. Your 40% threshold is extended to £35,620, saving you 20% tax on £1,250 = £250. So overall it would have cost you £750 for the charity to receive £1,250.

It is not possible to completely eliminate your tax bill by making donations under gift aid. Such gifts would only reduce your tax bill to 20%.

Leaving it to Charity

If you haven't made a Will, you should do so without delay. If you don't have any relatives you want to leave your estate to, consider making a Will that leaves most of your assets to specified charities. This avoids the potential problem of intestacy (dying without a Will), and saves tax as gifts to charities are free of inheritance tax. However, there are two traps to avoid:

Identifying the charity
Many charities have merged or changed their names in the recent past, so when it comes to distributing the estate according to the Will, it may be difficult to work out exactly which charity you intended the funds to go to. To avoid this problem make sure your Will states the charity's registered office and charity number. You can also include a clause in your Will specifying that the gift should be directed to any organisation that amalgamates with the original charity.

Residue of the estate
The second problem can occur where the charity has been left an undefined amount in your Will, such as the residue of your estate. This can lead the charity's officers hassling the executors, querying deductions such as legal fees and in extreme cases challenging the distribution of your estate in Court. To avoid this problem leave specified amounts of cash or assets to your chosen charities rather than the amount left over after other gifts have been made and any tax paid.