There are many ways to make a donation to charity and when doing so, there is also the potential to claim tax relief on the donation you make.
Gifting qualifying shares to a charity is one of the most tax efficient ways to make a donation. Not only is the charity benefitting from your donation but you can also reduce your tax liability in the tax year of the gift being made. In addition, there is no capital gains tax to pay on the disposal of the shares from your ownership in to the hands of the charity.
Initially, you should contact your chosen charity to ensure that they can accept a donation of shares from you and it should be noted that it is only qualifying investments that attract the relief. Once the shares have been transferred to your chosen charity, the charity can either retain the shares to produce an income stream from future dividends or sell the shares with no capital gains tax consequences as charities are not subject to capital gains tax and use the funds as they see appropriate.
What constitutes a qualifying investment?
- shares or securities which are listed on any recognised stock exchange for example, the London and Plus listed in the UK and any recognised overseas stock exchange
- shares and securities dealt in on any designated market in the UK – currently these comprise the Alternative Investment Market (AIM) of the London Stock Exchange and the PLUS - Quoted market of PLUS Markets.
- units in an Authorised Unit Trust (AUT)
- shares in a UK Open-Ended Investment Company (OEIC)
- the relief also extends to holdings in certain foreign collective investment schemes set up outside the UK that are similar to AUTs and OEICs
- if you are unsure as to whether your investment is a qualifying investment, you can contact HM Revenue & Customs (HMRC) Charities (0300 123 1073)
How is the income tax relief calculated?
The market value of the shares gifted to the charity is taken as a straight deduction from your total income in the tax year of the gift and this deduction therefore reduces your income tax liability. For example, if your total income before making the gift was £45,000 part of this income would be assessable at the higher rate of tax. Making a gift of shares with a market value of £5,000 would reduce a taxpayer's exposure to higher rate tax for the full £5,000 gift. From 6 April 2023, this is a tax saving of £2,100 for a gift of shares made by a Scottish taxpayer in the 2023/2024 tax year, and £2,000 for a taxpayer elsewhere in the UK.
How does this tax relief compare to make a monetary donation under the Gift Aid scheme?
As demonstrated above, the £5,000 market value of the shares gifted is taken as a full deduction whereas making a monetary gift of £5,000 to charity would simply extend a taxpayer's basic rate tax band allowing the £5,000 to be taxed at the basic rate rather than the higher rate. The tax relief using this method results in a lesser relief which will be the difference between the higher rate of tax and the tax rate of the band below.
Interaction with other taxes
There could also be an additional tax advantage where a taxpayer has incurred a capital gains tax liability. In order to determine the rate of capital gains tax a taxpayer is liable for; the gains are aggregated with their income to ascertain the tax band into which the aggregated total falls.
Therefore, if a higher rate taxpayer gifts sufficient shares to reduce their tax rate to fall within the basic tax band and they have incurred taxable gains which when aggregated with their income do not push the aggregated total back in to the higher rate tax band, the taxpayer will pay the lower rate of capital gains tax (18% for residential property gains, 10% for other gains).
If the gift of shares is not made, the taxpayer is subject to capital gains tax at the higher rates (28% for residential property gains, 20% for other gains).
How to claim relief
If you complete a self-assessment tax return, you should enter the market value of the shares that you gifted on the Tax Reliefs section of your return under charitable giving.
If you do not complete a tax return, you can notify HMRC in writing with details of the shares gifted and the amount of tax relief you wish to claim. HMRC will arrange either a refund of tax or your tax code may be changed so that you pay less income tax the tax year.