Charity Tax Law

Budget 2011 and other recent developments

Introduction

Giving to charity was an important strand in George Osborne's Budget on 23 March 2011 and the measures he announced have been largely positively received by charities. The changes broadly fall into two categories. First there are changes to the Gift Aid scheme for individuals and the equivalent relief for corporate giving to make them easier to administer and, in some cases, to enable charities to reap additional tax benefits. Second there is a proposed new relief from inheritance tax ("IHT") for individuals leaving legacies to charities in their wills.

In addition to the Budget announcements other recent developments in charity tax law deserve mention. From 1 April 2011 the unpopular so-called "substantial donor to charity rules", designed to prevent abuse in relation to charitable funds, are to be replaced with the "tainted charity donation" rules which, while still complex, should be easier to operate. Second, a new definition of charity for tax purposes was introduced in 2010 extending the tax definition to charities established in the EU and incorporating an express requirement that the charity managers be "fit and proper persons to be managers of the body or trust" in question. So far Treasury orders have made this new definition expressly applicable only for the purpose of Gift Aid and the Budget appears to contain no reference to its further extension in the immediate future.

We await publication of the Finance Bill expected on 31 March where we might find further detail in relation to some of the developments mentioned in this note.

Budget 2011

New inheritance tax relief announced for charitable gifts on death

If an individual gives to charity at least 10% of his/her estate, he/she will pay a reduced rate of IHT on death. (The 10% of the estate is calculated after deducting IHT exemptions such as the spouse exemption, reliefs such as business property relief and the nil rate band.) The reduced rate of IHT is 36% (compared to the normal rate of 40%). The reduced rate will apply in respect of deaths after 5 April 2012. If an individual with a taxable estate of £100,000 (having used his/her nil rate band during his/her lifetime) on death gives £10,000 to charity and £90,000 to his/her children, the IHT on the estate will be £90,000 x 36% i.e. £32,400. Thus £10,000 will go to charity and the children will receive £57,600. But if the charitable gift had not been made the children would have received £60,000 and the Exchequer would have received £40,000. In other words the gift to charity of £10,000 in effect "costs" the children only £2,400. The Government will be consulting on the detail of this measure over the summer.

Gifts by individuals and companies to charities: benefits limit increase

The long standing Gift Aid scheme encourages individuals, sole traders and partnerships to make money donations to charity. Under the scheme the donee charity reclaims tax at the basic rate from HM Revenue & Customs ("HMRC"). The individual donor, if a higher rate taxpayer, may reclaim higher rate relief on the donation.

The corresponding relief for corporate donors to charity works by treating the money donation as exempt from tax in the hands of the charity provided it is used for charitable purposes. The donor company can set the amount of the gift against its total profits to the extent that they are reduced to nil.

In respect of both Gift Aid for...