Charity and the tax man

Most of us give money to charity through the year, whether it's by trawling the charity shops or signing up for a direct debit. But what are the most effective ways for investors to donate to good causes?

Gifts from income

If you have ever sponsored a friend to run a marathon, or to grow a moustache for charity, you'll probably have been asked to apply Gift Aid to your donation. Gift Aid boosts the amount donated by allowing the charity to reclaim the basic rate of tax on every donation. So for every £1 you donate, the charity gets £1.25 (which is what you would have been paid to earn £1 after 20% income tax).

Higher- or additional-rate taxpayers can then reclaim the difference between their marginal and basic rate. So a 40% taxpayer who gives £1,000 to charity would see their donation boosted to £1,250 and can also claim £250 off their income-tax bill. As a result, a donation worth £1,250 to the charity ends up costing you just £750. The only thing to be aware of (though it's unlikely to affect many givers) is that you do need to have paid enough income tax in that year to cover the Gift Aid, otherwise you could find yourself facing an unexpected bill.

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On that front, it's worth remembering that you can also "carry back" Gift Aid for the year before if your income was higher. So let's say that your income for the 2016/2017 tax year was higher than it is during the current tax year. As long as you haven't yet filed your tax return for the 2016/17 tax year, you could enter any Gift Aid eligible donations even ones made after 6 April 2017 on that return, so long as you file by the January deadline. This can potentially be helpful if your income fluctuates from year to year, or if you just want to claim the Gift Aid as quickly as possible.

To claim the tax back, you must keep records of all donations made, even for trips to stately homes and museums that may encourage you to Gift Aid the entry fees. You don't just get Gift Aid on monetary donations. Some charity shops such as Oxfam run "tag a bag" schemes that will let you know how much any clothing or other goods you donate sold for, so that you can claim the Gift Aid.

Meanwhile, some employers may offer a payroll-giving scheme and even match your donation. Rather than having to reclaim the Gift Aid on your tax return, payroll giving instead provides a donation to your chosen cause from your gross monthly salary. This means that you receive tax relief upfront at the highest rate of tax you pay, rather than having to claim it back on a tax return.

Also, if you have money to give to charity but don't know where you want to donate, a Charities Aid Foundation (CAF) account allows you to put the money aside for all your giving and you only have to complete a Gift Aid declaration once. You can choose which charities to donate to (either via direct debit or one-off payments) by going online, phoning CAF or using CAF vouchers. Accounts can be opened with a minimum of £10 a month for one year, or a one-off payment of £100, but any money put into the account can't be withdrawn so be sure about how much you plan to donate.

Gifting from assets

You and your chosen charity can benefit from more than just your cash donations. Donating shares, land or property to charity can reduce your tax bill. Unlike with other gifts (other than those made to your spouse), you won't have to pay any capital-gains tax (CGT) on the transfer of your asset. Instead, you can deduct the market value of your donation from your income-tax bill for that tax year (either note it in the "charitable giving" section of your self-assessment form, or if you don't complete a tax return write to the tax office and they will deal with it for you). The charity can then sell your gift on, free of CGT.

However, there are some CGT and income-tax implications to be aware of. If the value of your asset a holding of shares, for example has fallen in value from when you purchased it (in other words, you've made a capital loss), you cannot then offset this loss against other capital gains (whereas if you disposed of it normally, you would be able to do this). Also, when claiming income-tax relief you would take what the shares are worth on the open market, plus any broker and legal fees. However, if the charity pays you anything for the shares, albeit less than they are worth, then clearly you also need to account for this and reduce your tax relief correspondingly. Do make sure to keep hold of all of the relevant documentation.

Transferring shares may be costly when accounting for dealing fees, especially if you only have a small portfolio. One solution is ShareGift, a charity that takes small pools of shares and aggregates them until there are enough to sell economically. There are no broker fees for transferring holdings to ShareGift and the proceeds are eventually distributed to a range of more than 2,500 causes.

As well as your CGT and income-tax bill, you can cut your inheritance tax (IHT) liability by willing money to charity. This has two possible benefits. The amount you leave can be taken off the value of your estate before IHT is applied, and if you leave more than 10% of your estate to charity, then the IHT rate charged on anything above the current £325,000 IHT threshold falls by 10%, from 40% to 36%.

Supporting charities through investment

Beyond giving money or assets, you can also consider investing in charities. Listed charity bonds can offer attractive-looking returns, and your money goes towards supporting various good causes. Like any other bond, charity bonds are just IOUs you are lending the charity money for a set period of time, and in exchange the charity pays you a fixed amount of annual interest. So far, bond issuer Retail Charity Bonds has issued five such bonds. Recent issuers include Greensleeves Homes Trust, which raised £33m to expand its care-home operations, with a bond paying 4.25% a year and maturing in 2026. Housing charity Dolphin Square Charitable Foundation, meanwhile, raised around £25m on a similar bond.

Charities with open issues can be found on the Retail Charity Bonds website (there currently aren't any). Once issued, the bonds themselves are tradeable on the London Stock Exchange's ORB platform, and they can be held in an individual savings account (Isa), meaning the interest is earned tax-free. However, it is worth noting that these bonds are likely to be thinly traded in other words, liquidity is low which means that you may struggle to get a good price for the bond if you want to sell before it matures.

It's also worth remembering that you should evaluate these investments as you would any other. These are not bank accounts. So check is the interest rate sufficient given the risks you are taking? What do the lender's books look like are they going to be able to pay you back? Could the charity default? So far Retail Charity Bond's issues have done well, but that's since 2014, and during what has so far been a very forgiving economic environment. So do your due diligence and if you're not satisfied, then perhaps just give money to charity and invest in something more suitable.