Our society has a strong culture of charitable giving. Whether they are quiet donations intended to help the needy, support religious tradition, or large gifts to cultural and academic institutions, millions of people donate to charity every year. So, you might think it’s straightforward, right?
Unfortunately, this isn’t always the case.
It’s a fantastic part of human nature that when people come into money – or realise they have more than they need – they will often make bigger donations to worthy causes. In fact, over the 12 months to May 2019, a record £3.75bn was donated to charities by 330 of the wealthiest people in the UK.
However, there are a number of considerations to keep in mind when giving to charity and it’s important to take time to think these through. This isn’t just for the benefit of worthy causes, as there are also several financial planning advantages that can be accessed.
With more than 168,000 official charities in England and Wales, coming in all shapes and sizes, you are spoilt for choice. Critically, some will be better placed to serve worthy causes than others so it’s important you pick the right one. Therefore, there is a growing emphasis on charity due diligence – not only understanding the foundation and how it works, but also the cause itself.
Understand the implications
There are several tax benefits to charitable giving. For instance, charitable giving can reduce your inheritance tax (IHT) bill. Under current rules, if you donate 10% or more of your estate to charity then the overall rate of IHT on the rest of your estate will fall from 40% to 36%. There are also ways to increase your marriage allowance and provide relief for income tax, so it helps to understand how these allowances can be used to benefit both your financial circumstances and the worthy causes you’re donating to.
Gift Aid can play a huge part in this too. This is the government scheme that effectively tops up qualifying charitable donations by 25%, as long as Gift Aid is applied for at the time of the donation. This means your chosen charity can benefit from a boosted donation at no extra cost to yourself. What’s more, if you pay tax above the basic rate, you can claim the difference between the rate you pay and the basic rate on your donation. For instance, if you’re a higher rate taxpayer who makes a £100 donation to Oxfam, you can personally claim back £25.
Consider donor-advised funds
There is also the option to use a donor advised fund (DAF) which is a vehicle designed to make tax-efficient charitable donations as flexibly as possible. With these structures, money is invested to grow tax-free and can be donated and managed at the donor’s discretion (which also allows them to benefit from tax relief). DAFs are increasing in popularity and as of 2018, accounted for £1.5bn of assets.
Donating to charity can be difficult but, as we’ve shown, it can also be done in a way that allows your finances to benefit, in addition to the worthy causes close to your heart. At London & Capital, we work with a lot of clients to help them fulfil their philanthropic desires and if you’re interested in learning about how we could help you with this then please get in touch with the team today.
To get in contact with London & Capital, please give us a call on +44 (0) 207 396 3388 or get in contact here.