For any client wishing to support a charity, it is worth bearing in mind that there are a number of ways of making their gift go further, thanks to generous tax reliefs from HMRC which they can take advantage of with the help of their Investment Manager.
As well as claiming income tax relief on the value of their donation, be that cash or shares, any shares (or property) gifted to charitable organisations are free from the capital gains tax that an individual would be subject to, should they gift these assets (to anyone except their spouse) or indeed sell them in the open market.
‘Gift Aid’ is the most commonly claimed relief and this goes straight to the charity the individual chooses to support. HMRC recognise that, for a basic rate taxpayer, a gift of say, £1,000 from ‘net’ salary would have cost the donor £1,250 of their ‘gross’ annual earnings. The charity is able to reclaim the tax paid by the individual through the Gift Aid scheme. In the financial year ending 2017, this amounted to £1.3bn for the benefit of charities across the UK. Those paying income tax at higher rates can reclaim further tax relief through their self-assessment.
Gifting shares is slightly more complicated, but can be more beneficial when the shares in question have appreciated significantly in value since the initial investment was made.
Once a higher rate taxpayer has exceeded their capital gains allowance for the year (currently £11,700), any further sale of securities, or gifts, are subject to a 20% charge on any appreciation in value since purchase. Gifts of publicly quoted shares to charity however will not result in a Capital Gains Tax liability. Further to this, as Gift Aid cannot be claimed by the charity when accepting shares, all of the income tax relief is to the benefit of the donor.
With the example above, if, instead of a cash donation of £1,000, the gift had consisted of shares with a market value of £1,000 and these shares had appreciated in value by 100% since their original purchase, i.e. the investor had bought the shares for £500. Any market sale of these shares would result in a tax liability of £100 (£500 gain x 20%). Instead, by gifting these shares straight to charity, the individual would save the £100 Capital Gains Tax, whilst their taxable income for the year would also be reduced by £1,000.
Larger, more established charities, will have their own investment portfolios into which clients can transfer shares. If interested, your investment manager and their team will be able to suggest a holding with significant gains and arrange the gift. For UK charities, this is very easy to do and the transaction will be reflected in your capital gains ‘tax report’ at the end of the year, (although should still be highlighted to your accountant).
For smaller charities, the transfer of shares can be harder to arrange and new transaction reporting standards mean that it may no longer be possible for shares to be sold whilst still held in the donor’s investment account, if the gain is to be recognised as the charity’s and not the donor’s.
As a means of overcoming this obstacle, clients of Smith & Williamson who also have accounts with the Charities Aid Foundation (CAF) can ask to have shares transferred into the Charities Aid Foundation dealing account at Smith & Williamson. Once held in this account, Charities Aid Foundation will be able to instruct the sale of any shares, and the proceeds transferred to the individuals own ‘CAF’ account, for distribution as and when they see fit, keeping administration to a minimum for smaller charities. CAF should also be able to assist any client who wishes to make a donation to a charity overseas.
It is also possible to gift shares to organisations such as ShareGift although, in this case, and particularly for smaller holdings, it is not always possible to specify the specific charity that will be supported. Since ShareGift was set up in 1996, over £29m has been channelled to charities through the organisation.
To conclude, for clients subject to tax on significant capital gains across their portfolio, gifting shares rather than cash can be a logical and efficient alternative, and can ensure that even modest gifts go much further.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.