Budget 2011 - Charities Update

In December 2010, the Culture Secretary Jeremy Hunt unveiled a 10-point action plan to boost philanthropy.  Action point 2 was for the Government to review what it can do to encourage philanthropy in the UK, reporting back in the Spring. 

Spring is well and truly here and the Chancellor has duly unveiled his proposals to (1) incentivise individual giving (2) ensure that charities get the full benefit of even small donations and (3) ease the bureaucratic burden on charities when claiming tax relief. 

Some of the proposals are intriguing, in particular the suggestion that deceased estates giving 10% to charity will pay inheritance tax at a reduced rate, and also the proposal that a gift of a work of art will entitle the donor to claim tax relief.  However detail is thin on the ground at this stage and it is perhaps a little difficult to view the proposals as (in the words of Mr Hunt) "...a major new approach that is designed to have an impact across the whole spectrum of cultural philanthropy."

Points to note include:

Inheritance tax bill reduction on gifts to charity made by Will   

For deaths that occur on or after 6 April 2012, a reduced rate of inheritance tax will apply where 10% or more of a deceased's net estate (after deduction of applicable inheritance tax exemptions, reliefs and any available Nil Rate Band) is left to charity.   In those cases the current 40% rate will be reduced by 10% to 36%.    The Government will be consulting in detail on this measure over the summer so no further information is available at the moment.   Once draft legislation is available it will be sensible to review charitable gifts made by Will, as, depending on levels, this could helpfully reduce the IHT bill on the chargeable estate.

Jeremy Hunt has pointed out that, in the US, those who earn more than £150,000 give eight times more than those in the UK.   However he failed to mention that US taxpayers have significant tax incentives to make gifts to charity and we need to see more such incentives in the UK if we are to match US-style giving.

Gift Aid
From April 2013, charities that receive donations of £10 or less will be able to apply for tax repayments without the need to obtain Gift Aid declarations.   This will for instance mean that charities collecting through small scale donations (for example change put into a charity box at a supermarket) will be able to reclaim tax in respect of the donations.  The total amount of donations on which this relief will be available is capped at £5k per annum per charity.  In order to qualify, the charity must have operated Gift Aid in full compliance with HMRC rules for at least 3 years.  The Government will be consulting with charity representatives on the details over the summer.    Whilst this change is welcome, because of the cap it is doubtful whether the tax recoverable by charities in this way will go much to re-coup the money lost when the basic rate of tax was reduced from 22% to 20% in 2008/9. Charities have not yet felt the pain of this, because transitional relief was introduced for 3 years, but that will end on 5 April 2011.  Transitional relief is worth 3p for every £1 given to charity.

The paper filing system currently used by charities to claim Gift Aid will be replaced by a new on-line system from 2012 / 13 . HMRC will work with the charity sector to develop the new system and a supporting electronic Gift Aid database for Gift Aid donations. In the meantime, HMRC will publish new forms to ensure that they have the correct information available for when the system does go on-line.

For donations to charity to qualify for Gift Aid relief, there are limits on the value of benefits that individuals and companies may receive as a result of making those donations. From April 2011 the benefit limit for donations of more than £10k will be increased  from £500 to £2,500. The existing rule that any benefit must not exceed 5% of the gift will remain.   HMRC will also publish revised guidance in April 2011 on Gift Aid benefits, to clarify a number of issues. 
Works of ArtThe Government is considering introducing a tax reduction for taxpayers who give a work of art or historical object of national importance to the State.  A consultation will take place over the summer. No further details are available at the moment.

Self Assessment Donate abolished
SA Donate was introduced in 2005 and allowed taxpayers to elect on their self-assessment return that any tax due from HMRC should be donated direct to charity.  This will be withdrawn for repayments of tax due on returns from 2011/12 and subsequent years,  and for any repayments made in respect of earlier years on or after 6 April 2012.   The reason given is that the scheme has not been very well used or cost effective.

Substantial donor rules
Legislation will be introduced in Finance Bill 2011 to replace the current unpopular substantial donor rules, with new rules that better target the purpose of those rules, which was to stop substantial donors obtaining financial advantages from their gifts.  There has already been a consultation on proposed draft legislation.  Some of the sector has welcomed the changes but some influential commentators, notably James Kessler QC, maintain they are not an improvement.