Category: Finance & Accounting

Are you prepared for the dividend allowance cut on your January 2020 tax return?

Dividend complexities

The dividend allowance, which was originally introduced from 6 April 2016, was cut from £5,000 a year to £2,000 from 6 April 2018. The cut is likely to have a significant impact on employees and directors of small businesses who receive both salary and dividend payments.
Many family-owned companies allocate dividends towards the end of their financial year and/or the tax year, so it was not until March/April 2019 that the impact of the reduction first started to hit home. Unfortunately, many other taxpayers may not become aware of the change until they complete their 2018/19 tax return, which in most cases, will be due for submission to HMRC by 31 January 2020.
How much tax is paid on dividend income is determined by the amount of overall income the taxpayer receives. This includes earnings, savings, dividend and non-dividend income. The dividend tax will primarily depend on which tax band the first £2,000 falls in.

The tax rates on dividend income, above the allowance, remain at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
For a basic rate taxpayer, the reduction in the allowance means an increase in tax paid on dividends of £225. For a higher rate taxpayer, the reduction increases the annual tax bill on dividends by £975, and for additional rate taxpayers, the increase is £1,143. Note that if dividend income falls between multiple tax bands, these figures will be different.
Dividend income is taxed at the taxpayer’s highest rate. This can often work in the taxpayers favour, particularly where a mixture of salary and dividends is received. For example, if a director receives a salary of £40,000 and a dividend of £12,000, their tax liability for 2019/20 will be as follows:

 

In this example, personal allowances are deducted first against the salary, leaving £27,500 of other income falling within the basic rate tax band (£37,500 for 2019/20). Dividend income falling within the basic rate band is £10,000 (£37,500 minus £27,500 used), with the remaining £2,000 falling above the basic rate limit. The dividend nil rate is allocated to the first £2,000 of dividend income, falling wholly within the basic rate band, leaving £8,000 within the basic rate band and taxable at the lower 7.5% rate. The remaining £2,000 of dividend income is taxable at the dividend upper rate of 32.5%.

Individuals who are not registered for self-assessment generally do not need to inform HMRC where they receive dividend income of up to £2,000. Those with income between £2,000 and £10,000 will need to report it to HMRC. The tax can usually be paid via a restriction to the PAYE tax code number, so that it is deducted from salary or pension. Alternatively, the taxpayer can complete a self-assessment tax return and the tax can be paid in the usual way (generally 31 January following the end of the tax year in which the income was received). Those receiving more than £10,000 in dividends will need to complete a tax return.

The allocation of various rate bands and tax rates can be complicated, even in situations where straight-forward dividend payments are made. Family business structures may be particularly vulnerable to the impact of the reduction in the dividend allowance, especially where multiple family members take dividends from the family company. A pre-dividend review may be beneficial is such cases.
Partner Note: ITA 20017, s 8 and s 13A

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Here’s how to reduce business and household costs by using simplified expenses

Simplified expenses for smaller businesses
Certain unincorporated small businesses may choose to use the ‘cash basis’ when calculating taxable income, under which participants are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming calculations designed for big businesses. Whilst easing the administrative burdens of preparing ‘traditional’ accounts, using the cash basis can also help with cash flow as it will not be necessary to accrue for income not yet received, or expenditure not paid out.
To complement the cash basis, HMRC also introduced ‘simplified expenses’ for small businesses. Basically, instead of working out the exact cost of certain expenses, HMRC allow the business to deduct a standard, or flat rate amount. Simplified expenses can apply to the following expenses:
• standard mileage rate for business use of cars or motorcycles;
• flat rate expenses for business use of home; and
• flat rate adjustment for personal use of business premises.
The taxpayer should, where relevant, record business miles for vehicles, hours worked at home and the number of people living at the business premises during the course of the tax year. At the end of the tax year, HMRC’s flat rates are used to work out the expenses, which are then included on the self-assessment tax return.

Vehicles
HMRC’s flat rate mileage allowances are designed to cover all vehicle-related running costs (insurance, repairs, servicing, fuel etc.). Current rates are as follows:
• first 10,000 miles               45p per mile
• exceeding 10,000 miles    25p per mile
• Motorcycles                        24p per mile
Using mileage rates is not obligatory, but once they have been used for a vehicle, they must continue to be used for as long the vehicle is used for the business.
Other travel expenses – train journeys, parking and such like – may be claimed on top of the mileage rates.
Where a car is purchased for business use, capital allowances may be claimed, but only if simplified expenses are not being used to work out business expenses for that vehicle.

Business use of home
A monthly deduction will be allowable if certain criteria are satisfied. Current rates are as follows:

Number of hours worked Monthly amount
25 to 50                                    £10.00
51 to 100                                  £18.00
101 or more                              £26.00

The number of hours worked in a month is the number of hours spent wholly and exclusively on work done by the person, or any employee of the person, in the person’s home wholly and exclusively for the purposes of the trade.

Mixed use
Where premises are used for both business and private purposes, instead of making the standard deduction outlined above, the business can make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:

Number of relevant occupants Applicable amount
1                                                               £350
2                                                                 £500
3 or more                                               £650

A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.

Benefits
Simplified expenses may help reduce business and household costs, without needing to retain the associated paperwork. However, like any flat-rate scheme, simplified expenses may result in an increased tax liability. The scheme may not be for everyone and certain checks should therefore be made before using it.

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Don’t lose out on tax reliefs for start-ups

Just starting out
As long as HMRC can be satisfied that a business is being run on a commercial basis with a view to making a profit, they will usually allow taxpayers to claim tax relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the preceding year. This can be quite beneficial as the claimant can choose which year to claim the losses against. However, HMRC will usually restrict loss relief claimed by individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.
Early days
The provisions for tax relief on business losses can be particularly useful in the early years of trading. Broadly, this is because a loss incurred in any of the first four tax years of a new business may be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if tax has been paid in any of the previous three years, the taxpayer should be entitled to a repayment of tax, which may be especially welcome in those often difficult first few years of running a business.
The rules for this carry back stipulate that the maximum amount of the loss must be offset each year – it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless the taxpayer was trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and the taxpayer may need a viable business plan to support a claim.
Cap on relief
A cap now restricts certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this restriction might apply. The cap is set at £50,000 or 25% of income, whichever is greater. ‘Income’ for the purposes of the cap is calculated as ‘total income liable to income tax’. This figure is then adjusted to include charitable donations made via payroll giving and to exclude pension contributions – the adjustment is designed to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, known as ‘adjusted total income’, will be the measure of income for the purpose of the cap.
The cap applies to the year of the claim and any earlier or later years in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.
No need to lose out
Where a loss is made in a tax year, but the trader does not have any other income against which it can be set, the loss can be carried forward indefinitely and used to reduce the first available profits of the same business in subsequent years.
Finally, losses arising from a business may be set off against any chargeable capital gains. Relief may be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

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Do you own a holiday cottage? You could get favourable tax treatment.

Furnished holiday lettings – is it worth qualifying?

When it comes to taxing rental income, not all properties are equal. Different rules apply to properties which meet the definition of ‘furnished holiday lettings’ (FHLs). While the rules now are not as generous as they once were, they still offer a number of tax advantages over other types of let.

Advantages

Properties that count as FHLs benefit from:

  • capital gains tax reliefs for traders (business asset rollover relief, entrepreneurs’ relief, relief for business assets and relief for loans for traders); and
  • plant and machinery capital allowances on items such as furniture, fixtures and fittings.

In addition, the profits count as earnings for pension purposes.

What counts as FHLs?

For a property to count as a FHL it must meet several tests. It must be in the UK or the European Economic Area (EEA), it must be furnished and it must be let commercially (i.e. with the intention of making a profit).

The property must also pass three occupancy conditions. The tests are applied on a tax year basis for an ongoing let, the first 12 months for a new let and the last 12 months when the let ceases.

The pattern of occupancy condition

The total of all lettings that exceed 31 continuous days in the year cannot exceed 155 days. If continuous lets of more than 31 days total more than 155 days in the tax year, the property is not a FHL.

The availability condition

The property must be let as furnished holiday accommodation for at least 210 days in the tax year. Periods where the taxpayer stays in the property are ignored as during these times the property is not available for letting.

The letting condition

The property must be commercially let as furnished holiday accommodation for at least 105 days in the year. Periods where the property is let to family or friends at reduced rate or free of charge are ignored as they do not count as commercial lets. Lets of longer than 31 days are also ignored, unless the let only exceeds 31 days as a result of unforeseen circumstances, such as the holidaymaker being unable to leave on time as a result of a delayed flight or becoming too ill to travel.

Second bite at the cherry

If seeking to secure FHL status, but the property does not meet the letting condition, all is not lost. Where the landlord has more than one property let as a FHL and the average rate of occupancy across the properties achieves the required 105 let days in the year, the condition can be met by making an averaging election.

A property may also be able to qualify if there was a genuine intention to meet the letting condition but this did not happen and the other occupancy conditions are met by making a period of grace election.

Further details on making averaging and period of grace elections can be found in HMRC helpsheet HS253 (see www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet).

Is it worth it?

While FHLs do enjoy favourable tax treatment, these are only available if the associated conditions are met. While FHLs, particularly in prime tourist locations, may be able to command high rental values in high season, the properties may lay empty for several weeks in the off season. By contrast, a longer term let will offer an element of security that multiple short lets may not provide. The decision as to whether striving to meet the conditions is worth it, is, as always, a personal one.

Partner note: ITTOIA 2005, Pt. 3, Ch. 6.

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Make sure you take into account stamp duty if you’re looking to buy a commercial property.

Stamp duty land tax on non-residential properties

Stamp duty land tax (SDLT) is payable in England and Northern Ireland on the purchase of property over a certain price. It applies equally to residential and non-residential properties, although the rates are different. Stamp duty land tax is devolved with land and buildings transaction tax (LBTT) applying in Scotland and land transaction tax (LTT) applying in Wales.

Non-residential property

As the name suggests, non-residential property is property other than that which is used as a residence. This includes commercial property, such as shops and office, agricultural land and forests. The non-residential rates of SDLT also apply where six or more residential properties are brought in a single transaction.

Mixed use properties

The non-residential rates of SDLT also apply to mixed use properties. These are properties which have both residential and non-residential elements. An example of a mixed use property would be a shop with a flat above it.

Rates

SDLT is charged at the appropriate rate on each ‘slice’ of the consideration. No SDLT is payable where the consideration is less than £150,000, or on the first £150,000 of the consideration where it exceeds this amount.

The rates of SDLT applying to non-residential properties are shown in the table below. They also apply to the lease premium where the property is leasehold rather than freehold.

ConsiderationSDLT rate
Up to £150,000Zero
The next £100,000 (i.e. the ‘slice’ from £150,001 to £250,000)2%
Excess over £250,0005%

Example

ABC Ltd buys a commercial property for £320,000. SDLT of £5,500 is payable, calculated as follows.

On first £150,000 @ 0%£0
On next £100,000 @ 2%£2,000
On remaining £70,000 @ 5%£3,500
Total SDLT payable£5,500

New leasehold sales and transfers

The purchase of a new non-residential or mixed use leasehold property triggers a SDLT liability on the purchase price (the lease premium) and also on the annual rent payable under the lease (the net present value). The two elements are calculated separately and added together.

The lease premium element is calculated using the rates above, while the rent element is payable at the rates in the table below. No SDLT is payable on the rent if the net present value is less than £150,000.

Net present value of the rentSDLT rates
£0 to £150,000Zero
£150,001 to £5,000,0001%
Excess over £5,000,0002%

Existing leases

SDLT is only payable on the lease price where an existing lease is assigned.

SDLT calculator

HMRC have published a handy calculator on the Gov.uk website which can be used to work out the SDLT payable on a commercial transaction. It can be found at www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro.

Scotland and Wales

The rates of LBTT payable on the purchase of non-residential properties in Scotland can be found at www.revenue.scot/land-buildings-transaction-tax/guidance/calculating-tax-rates-and-bands and the rates of LTT payable on the purchase of non-residential properties in Wales can be found at https://gov.wales/land-transaction-tax-rates-and-bands.

Partner note: FA 2003, s. 55, 56.

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Do you have a company that owns a residential property? This might apply to you

Annual tax on enveloped dwellings

The annual tax on enveloped dwellings (ATED) is a tax that applies, in the main, to companies owning residential property which is valued at more than £500,000.

The tax only applies on properties that are classed as ‘dwellings’. This is a property where all or part of it is used as a residence, for example a house or a flat. The ‘dwelling’ also includes the property’s gardens or grounds. However, properties such as hotels, guest houses, boarding school accommodation and student halls of residence fall outside the definition of a ‘dwelling’, and thus outside the scope of the tax.

Valuing the property

The tax only applies to dwellings with a value of at least £500,000. The amount of the charge depends on the value of the dwelling. Therefore, it is necessary to know the value of any residential property owned wholly or partly by a company (or a partnership with at least one corporate partner). The key date is the valuation date. From 1 April 2018 the valuation date is 1 April 2017. If the property was acquired after 1 April 2017, the value is the date of acquisition.

The valuation is an open market valuation.

How much is the charge?

The charge is an annual charge payable for the period from 1 April to the following 31 March.

The chargeable amount for 1 April 2019 to 31 March 2020 is shown in the following table.

Property valueAnnual charge
More than £500,000 up to £1 million£3,650
More than £1 million up to £2 million£7,400
More than £2 million up to £5 million£24,800
More than £5 million up to £10 million£57,900
More than £10 million up to £20 million£116,100
More than £20 million£232,350

Payment and returns

An ATED return must be filed by 30 April each year. The return should be filed using HMRC’s ATED online service. An agent can be appointed to file the return on the company’s behalf.

The tax must also be paid by 30 April.

Partner note: FA 2013, Pt. 3 (ss. 94—174, Sch. 33 – 35).

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For grandparents wanting to help out their children or grandchildren, habitual gifts can be made free of inheritance tax. Read more on our blog post.

Give from income to save inheritance tax

Within a family scenario, there are many situations in which one family member may make a gift to other family members. However, the way in which gifts are funded and made can make a significant difference to the way in which they are treated for inheritance tax purposes.

Not all gifts are equal

There is no inheritance tax to pay on gifts between spouses and civil partners. A person can make as many lifetime gifts to their spouse or civil partner as they wish (as long as they live in the UK permanently). There is no cap on the value of the gifts either.

Other gifts may escape inheritance tax if they are covered by an exemption. This may be the annual exemption (set at £3,000 per tax year), or a specific exemption such as that for gifts on the occasion of a marriage or civil partnership or the exemption for ‘gifts out of income’.

Gifts that are not covered by an exemption will counts towards the estate for inheritance tax purposes and, if the donor fails to survive for at least seven years from the date on which the gift was made, may suffer an inheritance tax bill if the nil rate band (currently £325,000) has been used up.

Gifts from income

The exemption for ‘normal expenditure out of income’ is a useful exemption. The exemption applies where the gift:

  • formed part of the taxpayer’s normal expenditure;
  • was made out of income; and
  • left the transferor with enough income for them to maintain their normal standard of living.

All of the conditions must be met for the exemption to apply. Where it does, there is no requirement for the donor to survive seven years to take the gift out the IHT net.

What counts as ‘normal’ expenditure?

For the purposes of the exemption, HMRC interpret ‘normal’ as being normal for the transferor, rather than normal for the ‘average person’.

To meet this condition it is sensible to establish a regular pattern of giving –for example, by setting up a standing order to give a regular monthly sum to the recipient. It is also possible that a single gift may qualify for the exemption if the intention is for it to be the first of a series of gifts, and this can be demonstrated. Likewise, regular gifts may not qualify if they are not made from income.

In deciding whether a gift constitutes normal expenditure from income, HMRC will consider a number of factors, including:

  • the frequency of the gift;
  • the amount;
  • the identity of the recipient; and
  • the reason for the gift.

The amount of the gift is an important factor – to meet the test the gifts must be similar in amount, although they do not have to be identical. Where the gift is made by reference to a source of income that is variable, such as dividends from shares, the amount of the gift may vary without jeopardising the exemption.

Gifts will normally be in the form of money to the recipient, or a payment on the recipient’s behalf, such as school fees or a mortgage. The reason for making a gift may indicate whether it is made habitually – for example, a grandparent may makes a gift to a grandchild at the start of each university term to help with living costs. It is also important that having made the gift, the donor has sufficient income left to maintain his or her lifestyle.

When making gifts from income, check that they may meet the conditions to ensure that the exemption is available.

Partner note: IHTA 1984, s. 21.

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Do you visit other offices or are you seconded to a different workplace? Make sure you’re getting the tax benefits

Travel expenses and the 24-month rule

As a general rule, employees are denied a tax deduction for the cost of travel between home and work. Likewise, subject to a few limited exceptions, if the employer meets the cost of home to work travel, the employee is taxed on it.

One of the main exceptions to this rule is where an employee attends a ‘temporary workplace’. This is a workplace that the employee goes to in order to perform a task of limited duration or one that he attends for a temporary purposes, even if the attendance is on a regular basis.

Example 1

Polly is based in the Milton Keynes office. She is seconded to the Bedford office for 12 months to cover an employee’s maternity leave. At the end of the secondment, she will return to the Bedford office.

The Bedford office is a temporary workplace.

Consequently, Polly is allowed a deduction for travel from her home to the Bedford office.

Example 2

James is a health and safety officer. He is based in the Liverpool head office. Each week he visits factories in Manchester and Bury to carry out safety checks. The factories are temporary workplaces as each visit is self-contained.

Consequently, James is allowed a deduction for travel expenses incurred in visiting the factories, even if he travels there from home.

24-month rule

A workplace does not count as a temporary workplace if the employee attends it in a period of continuous work which lasts, or is expected to last more than 24 months. A ‘period of continuous work’ is one where the duties are performed at the location in question to a ‘significant extent’. HMRC regard duties being performed to a ‘significant extent’ at a particular location if an employee spends 40% or more of their working time there.

The upshot of this rule is that where the employee has spent, or is likely to spend, 40% of their working time at the location in question over a period of more than 24 months, that location will be a permanent location rather than a temporary location. Consequently, home to work travel is ‘ordinary commuting’ (travel between home and a permanent workplace), which is not deductible.

It is important to appreciate that both parts of the test must be met for the workplace to be a permanent workplace – more than 40% of time spent there and over a period of more than 24 months.

Example 3

George is employed full-time at a care home in Southampton, a role which he has held for four years. He is sent to full-timework at a new care home in Bournemouth for three years, after which time he will return to the Southampton care home.

Although the move to the Bournemouth posting is not permanent, the posting lasts more than 24 months and, as such, the Bournemouth home does not qualify as a temporary workplace. 

Consequently, George is not allowed a deduction for the cost of travelling from home to the Bournemouth care home.

Change of circumstances

Circumstances can and do change. If at the outset a posting is expected to last 24 months, the workplace will be treated as a temporary workplace. If later the posting is extended so that it will last more than 24 months, the workplace ceases to be a temporary workplace from the date that it becomes apparent the posting will exceed 24 months.

Fixed term appointments rule

An employee undertaking a fixed-term appointment is not entitled to relief for home to work travel, even where it lasts less than 24 months, if the employee attends the workplace for all, or almost all of the period which they are likely to hold the appointment.

Example

Imogen takes on a 12-month contract at an office in Marlow. Although the appointment is less than 24 months, the Marlow office is not a temporary workplace as Imogen works there for duration of the contract.

Tax exemption

If the employer pays or reimburses travel expenses which would be deductible if met by the employee, the payment or reimbursement is exempt from tax.

Partner note: ITEPA 2003, ss. 289A, 338, 339;

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If you might want to sell a property cheaply to a family member make sure you read this first.

At first sight, the calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the amount received for the sale of that asset and the cost of acquiring (and, where relevant) enhancing it, allowing for the incidental costs of acquisition and disposal. However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.

Spouses and civil partners

The actual consideration, if any, is ignored for transfers of assets between spouses and civil partners. Instead, the consideration is deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.

Other connected persons

While the no gain/no loss rules for transfers between spouses and civil partners is useful from a tax perspective, the same cannot be said to be true for market value rule that applies to transfers between connected persons. Where two persons are connected, the actual consideration, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss.

The market value of an asset is the value that asset might reasonably be expected to fetch on sale in the open market.

Who are connected persons?

A person is connected with an individual if that person is:

  • the person’s spouse or civil partner;
  • a relative of the individual;
  • the spouse of civil partner of a relative of the individual;
  • the relative of the individual’s spouse or civil partner;
  • the spouse or civil partner of a relative of the individual’s spouse or civil partner.

For these purposes, a relative is a brother, sister or ancestor or lineal descendant. Fortunately, the term ‘relative’ in this context does not embrace all family relationships and excludes, for example, nephews, nieces, aunts, uncles and cousins (and thus the actual consideration is used in calculating any capital gain).

As noted above, the deemed market value rule does not apply to transfers between spouses and civil partners (to which the no gain/no loss rules applies), but it catches those to children, grandchildren, parents, grandparents, siblings – and also to their spouses and civil partners.

Example 1

Barbara has had a flat for many years which she has let out, while living in the family home. Her granddaughter Sophie has recently graduated and started work and is struggling to get on the property ladder. To help Sophie, Barbara sells the flat to her for £150,000. At the time of the sale it is worth £200,000.

As Barbara and Sophie are connected persons, the market value of £200,000 is used to work out Barbara’s capital gain rather than the actual consideration of £150,000. If she is unaware of this, the gain will be higher than expected (by £14,000 if Barbara basic rate band has been utilised), and Barbara may find that she is short of funds to pay the tax.

This problem may be exacerbated where the asset is gifted – the gain will be calculated by reference to market value, but there will be no actual consideration from which to pay the tax.

Partner note: TCGA 1992, ss. 17, 18, 272, 286.

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There are loads of ways to give to charities tax-free. What are your favourite charities?

Individuals who donate to charity can do so tax-free. There are various ways of making tax-relieved gifts to charity – the way in which the relief works depends on whether the donation is made via Gift Aid, as a deduction from wages or a pension via the Payroll Giving Scheme, in a will or whether it is a gift of land or property.

Gift Aid

A donation through Gift Aid is treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. Thus, the amount given equates to 80% of the donation and the charity benefits from the remaining 20%. This results in every £1 given through Gift Aid being worth £1.25 to the charity.

To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer. This is important – the tax that is paid to the charity comes from the tax paid by the individual, and if the individual has not paid sufficient tax to cover tax claimed by the charity on the donation, HMRC may ask the donor to pay the equivalent amount in tax. Taxpayers who make regular donations and who have a Gift Aid declaration in place should check that they have paid enough tax. This may be important for pensioners who, following an increase in the personal allowance, find that they are no longer taxpayers.

Donors who pay tax at the higher or additional rate of tax are able to claim relief of the difference between the higher or additional rate and the basic rate through their self-assessment returns. It is important that this is not overlooked and that records of donations are kept so the additional relief can be claimed.

Payroll giving

Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Employers wishing to operate a scheme must appoint a payroll giving agency. A list of approved payroll giving agencies is available on the Gov.uk website. The employer deducts the donation from the employee’s gross pay for PAYE purposes and pays it over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity.

As the deduction is made from gross pay, no tax is paid on it. However, the employee will still pay National Insurance on the amount donated (as will the employer).

Gifts in a will

Where a donation to charity is made in a will, the donation will either reduce the value of the estate before inheritance tax is calculated, or, if 10% or more of the estate is left to charity, reduce the rate of inheritance tax by 10% from 40% to 36%.

Giving land, property or shares to charity

Income tax or capital gains tax relief may be available for donations of land, property or shares to charity. Income tax relief is given by deducting the value of the donation from total taxable income for the tax year in which the gift was made to the charity. Relief is claimed in the self-assessment return.

Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.

Partner note: ITA 2007, Pt. 8, Ch. 2, 3; ITEPA 2003, Pt. 12; IHTA 1984, s. 23.

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