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How to boost charity donations and cut inheritance tax

Paloma Kubiak
Written By:
Paloma Kubiak

Charities are missing out on more than £940m every year because donors don’t claim tax relief. By leaving money to charity, donors can also cut the inheritance tax bill for loved ones.

This is at a time when 60% of charities have lost money due to the pandemic, according to the Charity Commission.

Yet it’s easy and quick to make sure a donation is tax-efficient, and it means more of your money will go to the charitable cause you’re supporting.

Despite a fall in donations, 68% of adults give money to charities every year which is equivalent to 35.9 million people, according to the research from Handelsbanken Wealth Management & Asset Management.

The war in Ukraine, for example, has seen many Brits sending money to help those forced to flee their homes.

Overall, the average amount given is £500 or £17.9bn per year. Younger people, those aged 18 to 34, donate average amounts of £1,056 while those aged 55 and over donate an average of £250.

But just 59% of UK adults are aware they can claim personal tax relief on donations and 60% are not claiming tax relief on donations.

The amount of money given by this 60% is estimated to be around £4.7bn, and with 20% tax relief this would result in an extra £940m for charities.

How to make tax-efficient donations

You can make tax-efficient donations to UK and EU charities, if they meet the UK definition of a charity, and you have paid tax or capital gains equal to the tax the charity will reclaim on the donation.

When giving money to charity, anyone who pays tax in the UK can make sure the donation is tax-efficient by ticking the box to make sure the money is donated with the Gift Aid scheme.

This means the government will add 25% to the donation, so if you donate £10, the charity will get £12.50, at no extra cost to you.

Higher-rate taxpayers can also claim tax relief on donations, when filling out a self-assessment tax return, via HM Revenue & Customs (HMRC) or through a financial planner.

The research of 2,000 adults by the bank shows that 9.5 million people claim tax relief on donations, of those, 29% do so through gift aid on a self-assessment tax form, 10% ask HMRC to amend their tax code, and 2% do so through their financial planner.

Tax advantages of leaving money to charity

There are also tax advantages of leaving money to a charity in your will and of the 22% who plan to do so, the average amount is £2,200.

Someone leaving 10% of their estate to a charity, for example, would see the Inheritance Tax (IHT) on anything above the IHT limit reduced from 40% to 36%. Yet just 18% are aware of this rule.

The average value of an estate worth more than £325,000 (the IHT nil-band rate), is £619,726. The bank estimates that these people could save £22,582 on their IHT bill if they were to leave 10% or more of the money to charity.

Mark Collins, head of tax at Handelsbanken Wealth Management & Asset Management, said: “Charity donors will want to see the organisations they support receiving the full benefit of donations, which should include claiming the tax relief whether it is through gift aid, or consulting a financial planner.

“Wealth advisers can guide people through how to maximise their donations, so they are effective for charities and their own IHT planning. Giving as much as 10% of your estate to charity can reduce IHT rates from 40% to 36% which would be very much welcomed by charities and potentially better reflect people’s wishes.”