Gift-Aid and CGT

[Lootman]

I am just learning about Gift-Aid, having never done it before. I read somewhere that the benefits of Gift-Aid (whether to the taxpayer or to the charity) are not limited to payers of income tax, but also payers of CGT.

The short version of my question is this: Can/does it ever make sense to use Gift-Aid if the only tax you pay is CGT?

The long version of my question is this: Suppose i make £100,000 a year in capital gains, and have no other income. (Ridiculous I know, but humour me here). CGT would be due on various tranches of that at 0%, 10% and 20% (securities, not property). What would be an optimal strategy to maximise the benefit of Gift-Aid, if any?

[tjh290633]

https://www.gov.uk/claim-gift-aid/

This is for the Charity, but CGT is specifically mentioned.

TJH

[mc2fool]

As explained elsewhere, the (material) benefits of Gift-Aid is solely to the charity, with any apparent benefit to the taxpayer actually just being a balancing such that what the charity receives is paid gross of tax by the donor.

The rules are actually very simple (if the arithmetic isn't always so):

a) What the charity claims from HMRC is 25p for each £1 donated under Gift Aid. (I.e. 20% tax grossed up)
b) The donor must pay at least enough income tax and/or capital gains tax as the amount that the charity(s) will reclaim for the donor's Gift Aided donation(s) in the year.

So, for the tax optimal benefit (for the charities), simply calculate what your income + CGT tax will be (exercise left for the reader), multiply it by 4 and donate that much. Simples.

[Lootman]

As explained elsewhere, the (material) benefits of Gift-Aid is solely to the charity, with any apparent benefit to the taxpayer actually just being a balancing such that what the charity receives is paid gross of tax by the donor.

I see that now, thank you.

a) What the charity claims from HMRC is 25p for each £1 donated under Gift Aid. (I.e. 20% tax grossed up)

Ah, so the benefit to the charity is the same even if the only tax you pay is CGT, with its lower rates than for income tax on an equivalent amount?

So, for the tax optimal benefit (for the charities), simply calculate what your income + CGT tax will be (exercise left for the reader), multiply it by 4 and donate that much. Simples.

Yes although of course you may not know exactly how much tax you will pay in a given tax year, until you do your SA return in the following tax year.

[mc2fool]

a) What the charity claims from HMRC is 25p for each £1 donated under Gift Aid. (I.e. 20% tax grossed up)

Ah, so the benefit to the charity is the same even if the only tax you pay is CGT, with its lower rates than for income tax on an equivalent amount?

Yes, your rates are irrelevant to it and, indeed, HMRC for this purpose; the criterion is just that you pay at least enough tax (income tax and/or CGT) in £ terms to cover the £ amount the charity will reclaim. If you think about it, it'd be an administrative nightmare if the Gift Aid reclaim amount varied by each donor's tax situation. This is the simple way for all to do it, although does lead the the appearance of money back for HRTs, but as previously explained that's just a gross up balancing. For CGT as the max rate (for securities) is 20% that doesn't arise.

So, for the tax optimal benefit (for the charities), simply calculate what your income + CGT tax will be (exercise left for the reader), multiply it by 4 and donate that much. Simples.

Yes although of course you may not know exactly how much tax you will pay in a given tax year, until you do your SA return in the following tax year.

Indeed.

[Dod101]

I think the point is that CGT in this context is 'a tax paid' just as income tax is. Gift Aid enables the tax payer to increase his donation (at no cost to himself) by the amount of tax he paid on the donation, irrespective of what particular tax he paid. In the case of most donors, that will be income tax and the tax recovery by the charity is limited to the basic rate of tax on income. The donor can himself recover the tax paid at the higher rate.

It should also be noted that if you are a tax payer, you can sign a declaration to say to a charity shop that you are gifting material stuff subject to Gift Aid and they can then recover tax on the monetary value of items donated (defined by the amount they sell them for)

Dod

[Lootman]

if you are a tax payer, you can sign a declaration to say to a charity shop that you are gifting material stuff subject to Gift Aid and they can then recover tax on the monetary value of items donated (defined by the amount they sell them for)

Ah so in that case a valuer in the charity shop would determine the valuation of the gifted item?

Now I think about it I donated some antique furniture to the British Heart Foundation a couple of years ago, and the guy there asked me about Gift-Aid. But I declined as I was wary of getting my name and address on various lists.

[Dod101]

if you are a tax payer, you can sign a declaration to say to a charity shop that you are gifting material stuff subject to Gift Aid and they can then recover tax on the monetary value of items donated (defined by the amount they sell them for)

Ah so in that case a valuer in the charity shop would determine the valuation of the gifted item?

Now I think about it I donated some antique furniture to the British Heart Foundation a couple of years ago, and the guy there asked me about Gift-Aid. But I declined as I was wary of getting my name and address on various lists.

As I understand it they use the selling price as the value of the donation which, if you think about it, is perfectly reasonable. I donated a lot of stuff after my wife died some years ago and I got a letter some months later thanking me for the donations and giving me the selling prices so that I had a figure for my tax return.

Dod

[SteelCamel]

As I understand it they use the selling price as the value of the donation which, if you think about it, is perfectly reasonable. I donated a lot of stuff after my wife died some years ago and I got a letter some months later thanking me for the donations and giving me the selling prices so that I had a figure for my tax return.

The way gift aid works with charity shops is that they sell the items on your behalf. Then you donate the proceeds to the charity and they claim gift aid on that cash donation. This is a workaround to the rule that gift aid can only be claimed on donations of cash.

[Dod101]

As I understand it they use the selling price as the value of the donation which, if you think about it, is perfectly reasonable. I donated a lot of stuff after my wife died some years ago and I got a letter some months later thanking me for the donations and giving me the selling prices so that I had a figure for my tax return.

The way gift aid works with charity shops is that they sell the items on your behalf. Then you donate the proceeds to the charity and they claim gift aid on that cash donation. This is a workaround to the rule that gift aid can only be claimed on donations of cash.

I understand that very well. Thank you. The effect is just as I described.

Dod

[Bouleversee]

As explained elsewhere, the (material) benefits of Gift-Aid is solely to the charity, with any apparent benefit to the taxpayer actually just being a balancing such that what the charity receives is paid gross of tax by the donor.

The rules are actually very simple (if the arithmetic isn't always so):

a) What the charity claims from HMRC is 25p for each £1 donated under Gift Aid. (I.e. 20% tax grossed up)
b) The donor must pay at least enough income tax and/or capital gains tax as the amount that the charity(s) will reclaim for the donor's Gift Aided donation(s) in the year.

So, for the tax optimal benefit (for the charities), simply calculate what your income + CGT tax will be (exercise left for the reader), multiply it by 4 and donate that much. Simples.

Explain this, then: So far, I have only paid basic rate tax. My understanding was that in that case Gift Aid is no benefit to me but if my charitable donations are paid under Gift Aid, the charities are able to claim back the 25% tax so I always try to do that, though some charities don't make it easy and I suspect they don't always bother to claim. I noticed that on the tax calculations sent to me in the last couple of years (since HMRC made it impossible for me to do my return online) it says: "Your basic rate limit has been increased by £x to £x for Gift Aid payments. This reduces the amount of income charged to higher rates of tax." It wouldn't have given me any benefit in those 2 years but as allowances reduce and dividends increase, it may do so in future, so it would be helpful to have this clarified as it contradicts what some Lemons, who in most respects know far more than I do, have said, unless they were referring solely to c.g.t. and not income tax. There are some charities I would be happy to donate more to if it kept me within the basic rate. I have a number of capital losses declared over the years and carried forward and a number of certificated holdings and non-ISA holdings in platform accounts which it would pay me to get rid of one way and another before any more large dividends, such as Tate & Lyle's payment in conjunction with share consolidation, which are going to bump up my tax for the current year and I'm trying to get my enfeebled brain round that and act accordingly a.s.a.p. I obviously can't know yet whether the net result for disposals for the year will be a net gain exceeding my c/f losses and current year allowance or a net loss. I need to devise a strategy or just say to hell with it all and get on with clearing up the leaves etc. which doesn't require any brain power.

[mc2fool]

As explained elsewhere, the (material) benefits of Gift-Aid is solely to the charity, with any apparent benefit to the taxpayer actually just being a balancing such that what the charity receives is paid gross of tax by the donor.

The rules are actually very simple (if the arithmetic isn't always so):

a) What the charity claims from HMRC is 25p for each £1 donated under Gift Aid. (I.e. 20% tax grossed up)
b) The donor must pay at least enough income tax and/or capital gains tax as the amount that the charity(s) will reclaim for the donor's Gift Aided donation(s) in the year.

So, for the tax optimal benefit (for the charities), simply calculate what your income + CGT tax will be (exercise left for the reader), multiply it by 4 and donate that much. Simples.

Explain this, then: So far, I have only paid basic rate tax. My understanding was that in that case Gift Aid is no benefit to me but if my charitable donations are paid under Gift Aid, the charities are able to claim back the 25% tax so I always try to do that, though some charities don't make it easy and I suspect they don't always bother to claim. I noticed that on the tax calculations sent to me in the last couple of years (since HMRC made it impossible for me to do my return online) it says: "Your basic rate limit has been increased by £x to £x for Gift Aid payments. This reduces the amount of income charged to higher rates of tax." It wouldn't have given me any benefit in those 2 years but as allowances reduce and dividends increase, it may do so in future, so it would be helpful to have this clarified as it contradicts what some Lemons, who in most respects know far more than I do, have said, unless they were referring solely to c.g.t. and not income tax. There are some charities I would be happy to donate more to if it kept me within the basic rate. I have a number of capital losses declared over the years and carried forward and a number of certificated holdings and non-ISA holdings in platform accounts which it would pay me to get rid of one way and another before any more large dividends, such as Tate & Lyle's payment in conjunction with share consolidation, which are going to bump up my tax for the current year and I'm trying to get my enfeebled brain round that and act accordingly a.s.a.p. I obviously can't know yet whether the net result for disposals for the year will be a net gain exceeding my c/f losses and current year allowance or a net loss. I need to devise a strategy or just say to hell with it all and get on with clearing up the leaves etc. which doesn't require any brain power.

IIUC, the question teased out of all that is in respect to Gift Aid and the higher rate tax threshold, being if you donate more will it keep you within the basic rate, yes?

Yes, but as I say, any such apparent benefit to you is actually just a balancing so that your donation is tax free for you. Let's take an example and say that you are a basic rate taxpayer that is exactly on the boundary of the higher rate. So, you're paying a marginal 20% on your current income but if you earn a penny more it'll be taxed at 40%.

Ok, so let's say you donate a Gift Aided £100 to some charity. That's out of net income; your gross income to be able to make that donation, as a basic rate payer, would be £125, which is what the charity gets from your donation + the Gift Aid. So, the end effect is that you've made the donation out of gross income, i.e. tax free to you.

But as you note, the donation increases the basic rate limit (i.e. the higher rate tax threshold) by the grossed up amount of the donation, £125. So, if you were, as per our example, exactly on the boundary then yes, yippee, you can now earn an extra £125 gross that will be taxed at only 20% rather than 40%, so giving you £100 net -- but you had to give away £125 gross/£100 net to get that.

So, yes, by all means donate as much as you like, but there isn't any free lunch here.

[Lootman]

by all means donate as much as you like, but there isn't any free lunch here.

It seems to me that there is a free lunch, but it is the charity that gets to eat it, not the taxpayer.

Although if you are determined to donate £125 anyway then you are still better off by up to £50 if you choose to do it via Gift-Aid.

The US approach is simpler. You just deduct all valid charitable contributions from your taxable income. But I guess it comes to the same thing ultimately.

[gpadsa]

So, yes, by all means donate as much as you like, but there isn't any free lunch here. ;)

is there another free lunch, the allowance for earned interest stays at £1k rather than dropping to £0.5k?

gpadsa

[mc2fool]

So, yes, by all means donate as much as you like, but there isn't any free lunch here.

is there another free lunch, the allowance for earned interest stays at £1k rather than dropping to £0.5k?

As Gift Aided contributions to charities are effectively made out of gross income what they effectively do for tax purposes is simply reduce your gross income, the same as if you'd never earned it. So it's as much of a free lunch for you as that well known tax reduction method of earning less!

[gpadsa]

Let's say I have income & taxation:
(1) earned income £100 more than the higher rate threshold, taxed at 40% = £40
(2) interest earned £1000, higher rate personal allowance £500, the other £500 taxed at 40% = £200
HMRC bill = (tax on personal allowance/basic rate amount of earned income) + £240

Then I decide to gift aid donate £80 to CRUK. HMRC raises my higher rate threshold by 1.25x £80 = £100 so my earned income is back within the basic rate band and the personal allowance on interest earned goes up to £1000.
(1) earned income £100 more than original higher rate threshold but now under/just reaches new higher rate threshold so taxed at basic rate 20% = £20
(2) interest earned £1000, basic rate personal allowance £1000, tax is £0
HMRC bill = (tax on personal allowance/basic rate amount of earned income up to original threshold) + £20
(3) I did pay that £80 to CRUK, which then claims £20 from HMRC

So after my £80 CRUK donation, I have £240 - £20 - £80 = £140 more in my pocket, CRUK has £100 more and HMRC is £240 worse off

minding the pennies & all that - not quite Nadhim Zahawi territory

gpadsa

[pochisoldi]

Let's say I have income & taxation:
(1) earned income £100 more than the higher rate threshold, taxed at 40% = £40
(2) interest earned £1000, higher rate personal allowance £500, the other £500 taxed at 40% = £200
HMRC bill = (tax on personal allowance/basic rate amount of earned income) + £240

Then I decide to gift aid donate £80 to CRUK. HMRC raises my higher rate threshold by 1.25x £80 = £100 so my earned income is back within the basic rate band and the personal allowance on interest earned goes up to £1000.
(1) earned income £100 more than original higher rate threshold but now under/just reaches new higher rate threshold so taxed at basic rate 20% = £20
(2) interest earned £1000, basic rate personal allowance £1000, tax is £0
HMRC bill = (tax on personal allowance/basic rate amount of earned income up to original threshold) + £20
(3) I did pay that £80 to CRUK, which then claims £20 from HMRC

So after my £80 CRUK donation, I have £240 - £20 - £80 = £140 more in my pocket, CRUK has £100 more and HMRC is £240 worse off

minding the pennies & all that - not quite Nadhim Zahawi territory

gpadsa

Caution - there's an assumption here that the savings and dividend allowances are "a tax free allowance".
They aren't - they are bands of income taxable at 0%. (Compare with interest within an ISA - ignored on your tax return and truly tax free)
Since they form part of your taxable income, they still need to be added in when determining if you are going to cross into the next tax band.

In most cases, "taxfree vs 0%" makes no difference, but if you are close to the higher rate band, the difference is significant.
For example:
Joe has (higher rate band)-£999 of earning+dividends, and £1000 of savings income.
That pushes him £1 into the higher rate tax band.
Since he is now in the higher rate band, his savings allowance drops to £500.
His £1000 of savings income gets taxed as follows:
£500 at 0% (covered by savings allowance)
£499 at 20% (falls into basic rate band) (=£99.80)
£1 at 40% (in the 40% band) (=£0.40)

So that £1 that took Joe into the higher rate band cost him £100.20 in additional income tax.
If he donates just 80p to a charity, he has no higher rate income, no reduction in savings allowance, and gets a 20p tax refund into the bargain.

Similarly with the 40 to 45% band change
£1 over causes the savings allowance to drop to zero, and £500 of savings gets taxed at 45% on the whole lot. That £1 costs you £225, and that 80p donation saves the £225 and gives you a 25p tax refund...

Personally I would rather that the savings allowance is turned into a "upto £200" tax credit for 20% and 40% taxpayers, same net effect as having a £1000/£500 limit, but without the penal rate of tax where marginal savings income pushes total income into the 40% band.

[Dod101]

I have not attempted to follow all these complicated workings but, lest we forget, the principle is very simple.

You give money to a charity and HMRC will allow the charity to recover the basic rate of tax that the donor has paid, and if the donor is a higher rate taxpayer, the donor can recover that higher rate of tax paid for himself. Thus there is no tax levied on a donation to a charity. The only complication is in how the tax paid is recovered and credited. No free lunch as far as I can see.

I make regular monthly donations to a charity and found myself a couple of years ago with insufficient tax paid by myself to cover the recoveries of tax made by the charity and had to refund HMRC with some of the tax paid out. I pay very little tax. The result is that I had to tell the charity to cancel my Gift Aid Declaration, but I increased my monthly donation a bit although I did not feel like covering the entire loss to the charity

Dod

[gpadsa]

Caution - there's an assumption here that the savings and dividend allowances are "a tax free allowance".
They aren't - they are bands of income taxable at 0%. (Compare with interest within an ISA - ignored on your tax return and truly tax free)
Since they form part of your taxable income, they still need to be added in when determining if you are going to cross into the next tax band.

Thank you for that, it was very helpful in doing final calculations in anticipation of 05/04/23 which is looming into view

It would be nice if HMRC would let us start a draft self assessment during the current tax year to get a check on calculations & positioning rather than having to make up a spreadsheet for personal circs

gpadsa