new inheritance tax charity relief

A reminder that the new reduced rate of Inheritance Tax is now in force. It applies to deaths occurring after 5 April 2012. Where more than 10% of the net estate is given to charity, the rate of tax applying to the rest of the estate is reduced from 40% to 36%. Charitable gifts are of course tax exempt.

There are two main actions: First, consider whether you should be giving 10% or more to charity in your own Will. Second, if you are a beneficiary under the Will of someone who has died since April, you may wish to consider entering into a Deed of Variation to make or increase the charitable gifts in order to qualify for the lower rate.

Are you taking advantage of this reduced rate? Leave your comments and questions below.

the Scotland Act

The Scotland Act 2012 received Royal Assent on 1 May 2012.

The Act gives the Scottish Parliament the power to set a Scottish rate of income tax to be administered by HMRC. Applying to the non savings income of Scottish taxpayers and expected to be implemented from April 2016, it provides for a number of taxes to be devolved to Scotland, including land taxes.

The definition of a Scottish taxpayer is based on the location of an individual’s main place of residence. So, a Scottish taxpayer could be employed by an English (or Welsh or Northern Irish) employer who will have to apply the Scottish rate of income tax.

Each main rate of UK income tax (that is, the basic, higher and additional rates) will be reduced by 10%. At the same time, the Scottish Parliament will set a rate that may be higher or lower than 10% and will be added to the main UK rates (as reduced). So, if the UK basic rate is 20% and the higher rate 40% and, at the same time, the Scottish rate is set at 12%, Scottish taxpayers will pay a basic rate of 22% (20% less 10% plus 12%) and higher rate taxpayers 42%. Similarly, if the Scottish rate is set at below 10%, Scottish taxpayers will pay a lower overall rate of tax than taxpayers elsewhere in the UK.

Savings and dividend income of Scottish taxpayers will be taxed at the main UK rate and is unaffected by the Scottish rate. An added complexity!

This all clearly has implications for charitable giving and Gift Aid – which have been discussed by an HMRC high level technical group on which Stewardship was represented. We concluded that it would be unduly complex both for charities and for taxpayers if Gift Aid donations were to be made by reference to the Scottish basic rate of tax. Therefore Gift Aid will continue as now. When a donor makes a gift to charity, after April 2016, they will be deemed to have deducted tax at the UK basic rate and not the Scottish basic rate.

However, the charity is not concerned with the claiming of higher or additional rate relief. This is claimed by the donor on their personal tax return. Accordingly, where a higher or additional rate taxpayer wishes to claim relief on the gross value of their charitable donations, this will be calculated on the difference between the Scottish rates only. So, if the Scottish rate is set at 12% such that the Scottish higher rate is 42% and the Scottish basic rate is 22%, the calculation will be on the difference between 42% and 22%.

Note: the deemed gross value of a charitable donation by a Scottish taxpayer, for the purposes of the higher or additional rate relief only, will be grossed up at the Scottish basic rate rather than the UK rate. This means that the value of the higher / additional rate relief may differ slightly from a donor in the rest of the UK.

For example, if a non Scottish UK donor makes a gift of £100 to charity, the value of the gift grossed up at the UK rate of 20% is £125. Higher rate relief is calculated on £125. If a Scottish donor makes a gift of £100 and the Scottish basic rate is 22% (as above), the grossed up value of their gift is £128.21. The higher rate relief will be based on this figure and not £125 despite the fact that the charity will always reclaim the basic rate tax of £25 (ie the UK wide rate) regardless of the geographical location of the donor.

Gifts made by Scottish taxpayers under the payroll giving scheme will always be calculated at the Scottish rates. This is because the donor’s PAYE code will identify them as a Scottish taxpayer – even if they work for a UK employer based outside Scotland (for example where the taxpayer lives in Scotland but goes to work the other side of the border).

Relief for gifts of shares or property to charity that qualify for income tax relief is given through the self assessment tax return. The charity does not claim income tax relief on these gifts as it is all given to the donor. As such, it is a straightforward process for all of the relief to be given at the Scottish rates.

A Technical Note (‘Clarifying the Scope of the Scottish Rate of Income Tax’) has now been published and HMRC are inviting comments until 31 August 2012. To access your copy of the Note, click here.

who says I'm not fit and proper?

The Finance Act 2010 introduced a requirement that, to qualify as a charity for tax purposes, the charity must meet a ‘management condition’. This condition is satisfied if  all of the charity’s ‘managers’ are ‘fit and proper persons’.  If a charity fails this test then HMRC can refuse or cancel its ‘tax status’; meaning that it will no longer be eligible for charity tax benefits such as Gift Aid.

As this requirement covers the charity’s ‘managers’, it goes beyond the  trustees and may include employees and volunteers.  Broadly, the ‘managers’ are those people who are appointed to positions of trust or influence in the charity and whom are able to exert control or influence over the charity’s finances and tax affairs. HMRC will expect the charity trustees to be able to show, if asked, that they have given proper consideration to the suitability of persons appointed to these positions – i.e. that they are ‘fit and proper’ persons.

No definition of what constitutes ‘fit and proper’ is provided, but HMRC’s criteria goes beyond that applied when looking at whether someone is fit to be a trustee.

Some factors that may lead the HMRC to conclude that a person is not fit and proper if:

• they have a history of tax fraud;
• they have a history of other fraudulent activity including misrepresentation and identity theft;
• HMRC has knowledge of their involvement in attacks against or abuse of tax repayment systems;

• they are barred from acting as a charity trustee by a charity regulator or Court, or are disqualified from acting as a company director.

It is up to the charity to ensure that managers are fit and proper.  HMRC’s working position is an assumption that the charity has given sufficient and proper consideration to the suitability of their managers.

To assist charities to evidence this process, HMRC has provided a suggested (non mandatory) procedure that charities may wish to follow when appointing trustees and managers.  This takes the form of a basic guide which the prospective manager can read before signing a declaration of their ‘fit and proper’ status. Whilst this may be relatively easy to use in the more formal relationships of a commercial environment, it becomes far more sensitive within the setting of the ‘church family’.

Most church appointments, whether to the role of trustee, manager or worker, are drawn from a pool of people who are quite well-known and whose backgrounds are ‘known’ within the church.  Not many churches that we are aware of make use of the HMRC’s guidelines and declaration, seemingly preferring to rely more on established personal relationships.  There are occasions when charities have found themselves using staff or volunteers with a history that has some ‘bad bits’ which they may or may not know. HMRC may not take a generous view if this happens. This is rare but means this is another area where striking a suitable balance is a delicate task for the charity and its trustees.

More details on HMRC’s fit and proper requirements including the basic guide and a pro forma declaration can be found at www.hmrc.gov.uk/charities/guidance-notes/chapter2/fp-persons-test.htm .

give it back George!

Stewardship backs campaign demanding that the Government reconsiders controversial plans to cap tax relief on charitable giving.

UPDATE - 23/05/2012

The national media picked up on the announcement in the Budget of a proposed cap on tax relief for charitable giving. Stewardship has been working hard behind the scenes to evaluate the likely cost of the proposal and its impact on the sector, while also providing commentary to the national and sector press. Analysis reveals the likely impact on philanthropy and the economic effects are complex but are likely to be negative for both the sector and the Exchequer.

One thing is clear: this measure will impact small and large charities alike – and small as well as large donations to those charities.

Having met with HMRC officials, the Treasury and with David Gauke, the Exchequer Secretary to the Treasury, our team are now in the process of drawing up a comprehensive Briefing Paper. The intention of the Paper will be to inform Christians of the issues, so that intelligent responses can be given to the Public Consultation promised by the Coalition Government for this Summer. Watch out for a special edition of ‘Legal Eagle’ announcing the new Paper.

Stewardship has signed up to the giveitbackgeorge campaign to ask the government to make a U-turn on its proposal to a cap on big charitable donations.

We urge readers to find out about the issues, the threat to charities’ income as a result of the introduction of a cap and to support the campaign, both as individuals and organisations.

What is it all about?

If the recent Budget announcement goes ahead, as of April 2013, relief will be limited to the tax on £50,000 of charitable giving, or a quarter of the donor’s income, whichever is greater.

Under current rules, taxpayers can claim tax relief on the income from which they make charitable donations. For basic rate taxpayers, the relief is claimed by the charity. For higher rate taxpayers, they can personally reclaim the difference between the tax they pay and the basic rate claimed by the charity.

Why does this matter?

Within the church, and the faith sector in general, personal levels of giving are much higher than amongst charities in general. Many donors give quietly and sacrificially and some donors even work out how much they need to live on, and from their very significant income, choose to give the rest away to charity.

In a survey conducted by CAF, nine out of ten top charity executives said that the planned cap would hit donations hard and revealed that Britain’s richest seven per cent were responsible for almost half of their total donations received last year. The latest Sunday Times Giving List also reports that the top 100 donors gave a total of £1.67 billion out of the UK’s £11 billion annual giving total.

Because major donors give very intentionally, a withdrawal of tax relief will mean not only less tax relief to charities, but a reduction in the actual gifts that come to charity.

Our preliminary calculations suggest that this reduction could mean 30% less giving coming into the charity sector, including churches. And that is before any tax relief is given.

This measure is not about tax avoidance, or fraud on charitable gifts, nor is it about charities not operating for the good of society. And it is not really a bid to stop the rich from using charitable donations to cut their tax bills because the Government’s own estimates of the resultant savings are just too small.

Our hope is that this measure was a last minute, ill-conceived addition to a budget designed to demonstrate to the public that the government is prepared to be tough with those it believes should be paying taxes, but are able to use the assortment of tax reliefs available to reduce this obligation to well below the basic rate.

In so doing, tax reliefs available to those giving most generously and sacrificially have been innocently swept up in the process.

Stewardship’s response

In engaging with major donors over the last few weeks, we have been struck by the humble approach of these people; by their compassion and love for their neighbour, and their clear motivation, far from obtaining tax relief, is to personally contribute to making society a better place to live in. But, they are sadly reflecting that the cap will inevitably mean that they will have to reduce their giving from next year.

One donor indicated that they would emigrate, with their family, to enable them to restore their philanthropic objectives. Others may hold back from making larger gifts until more favourable measures are in place, or throttle back their giving during their lifetime and instead leave a larger legacy many years in the future.  If this is repeated by others, the Government will lose more than their support for society; they will lose tax revenues from whole families that would otherwise have continued in the years to come.

Stewardship is keeping the pressure up to see this measure removed. We are engaging with HM Revenue & Customs, with HM Treasury and with Treasury Ministers directly to help represent the voice of Christian giving in the UK, where we know sacrificial giving is most prevalent.

Concluding thoughts

The UK has long been recognised as one of the most generous in the world. However, if George Osborne’s changes take effect in April 2013 it will not be the rich who suffer, but the poorest in society.

Please join us in seeing this proposal defeated before it is too late:

• If you are personally impacted by the proposal, please consider sharing your thoughts with us, on a confidential basis.
• Sign up to the giveitbackgeorge campaign
• Respond to the Government’s Public Consultation, due to be published in the summer. Most consultations have a three month response period.
• Keep checking back to the Stewardship website as we will add more resources and informed comment ahead of the Government’s Public Consultation on the proposal. And please, please respond to the Consultation once it has been published. The Government need to understand the damage that a cap will do to the charity sector.

For more information…

General enquiries, please contact Bethan Walker on 020 8418 8167.

Individuals who are directly affected by this proposal, please contact Kevin Russell, Technical Director via kevin.russell@stewardship.org.uk.

help us fight the charity tax relief cap proposal

The Government proposes, from April 2013, to restrict the tax relief for charitable gifts – whether under gift aid, payroll giving, or gifts of shares, and land and property. Whilst this will not impact on most donors, major and sacrificial giving will be impacted. Anyone who gives a gift aid gift or gifts in a year of over £40,000 may see their tax relief restricted, and may even find that they have to pay HMRC for the privilege.

If you do personally make large gifts to charity that could be affected, would you be prepared to help us resist this measure? We need evidence of the potential impact to take to HMRC and the Treasury. If you would be prepared to speak to us about your personal experience, send an e mail to Kevin.Russell@stewardship.org.uk with a contact telephone number. Anonymity can be protected where requested.

image courtesy of www.giveitbackgeorge.org