Tax reliefs are available to encourage donations to charity. Those who wish to make gifts of land or buildings to charities can benefit from lower tax bills as a result of the availability of income tax and capital gains tax (CGT) reliefs. Relief is also available from inheritance tax (IHT) for gifts to charity.
Income tax relief
Income tax relief is available where an individual gives land or buildings to a charity or sells them to the charity at less than their market value. To qualify for relief, the land and buildings must meet the definition of a qualifying interest in land. For these purposes, a `qualifying interest in land’ means a freehold interest in land in the UK or a leasehold interest in land in the UK. Further, the individual must dispose of the whole of their beneficial interest in that land. This means that it is not possible to give, say, your home to a charity and continue to live in it. Where property is owned jointly, relief is only available if all the owners dispose of their interests to the charity and at least one of the owners is an individual.
To make a gift of land or buildings to a charity it is first necessary to contact the chosen charity to ensure that it is able to accept the gift. When making a gift of land or buildings to a charity it is necessary to obtain a certificate from the charity which contains a description of the qualifying interest in the land or property that has been sold or given to the charity, the date of the disposal and a statement confirming that the charity has acquired the qualifying interest in the land or property.
It is important that the land or property is given to the charity or disposed of to the charity for less than market value, rather than the disposal proceeds from selling that land or property. If the charity asks the donor to sell the property on their behalf, the sequence events should be to give or dispose of the property to the charity first and then sell it rather than the other way around. If the property is sold first and the proceeds are then given to the charity a CGT liability may arise on the sale of the property if it is not the donor’s main residence. The amount of income tax relief that is available will depend on whether an outright gift was made of the property or whether it was sold to the charity for less than its market value.
Where the property is given to a charity, the amount of income tax relief available is the market value of the asset plus any costs associated with the gift, such as legal or valuation fees, less any money or other benefits received in return for making the gift.
If the land or property is sold to the charity for less than market value, the income tax relief is the market value of the property plus any costs associated with the disposal, such as legal or valuation fees, less the sale proceeds received and any money or other benefits received return for disposing of the property for less than market value.
The market value of the property is the price that the asset might reasonably fetch in the open market. The relevant market value for the purposes of working out the income tax relief is the market value on the date on which the property is transferred to the charity. It will usually be necessary to obtain a professional valuation, but the costs of the valuation can be taken into account when working out the tax relief.
The relief is given against total income (but not capital gains) for the tax year in which gift or disposal occurs. The relief cannot be carried forward or carried back and to the extent that it is not used in the tax year of the gift, it is lost. Therefore, when making such a gift, where possible it should be timed to ensure that the donor has sufficient income in the tax year to fully utilise the relief.
Example 1 – Income tax relief
Reginald has a holiday home that he no longer uses. He decides to donate it to the cancer charity that cared for his late wife. The property is valued by a professional valuer at £120,000. The valuer charges a valuation fee of £500. Reginald also incurs legal fees of £800.
The charity is very grateful to Reginald for the gift and gives him tickets to a gala dinner by way of thanks. These are worth £300.
Reginald has total income for the tax year in question of £200,000.
The amount of income tax relief available to Reginald is computed as follows:
Market value of holiday home 120,000
Valuation fee 500
Legal fee 800
Less: benefits received (gala dinner tickets) (300)
Income tax relief 121,000
Reginald total income of £200,000 is reduced to £79,000 as a result of deducting the income tax relief of £121,000.
The relief is not given automatically and must be claimed. This can be done on the self-assessment return. Records related to the gift or disposal should be kept in support of the claim.
CGT relief is also available when you give an asset to a charity or sell it to a charity for less than its market value.
If an asset is given to a charity or sold for less than it cost, the disposal is treated as being on a no gain or no loss basis. Consequently, there are no capital gains tax implications.
If an asset is sold to a charity for less than market value but for more than it cost, a capital gain will arise equal to the difference between the sale proceeds and the allowable costs.
Example 2 – CGT relief
Assume the facts are as in the example above and Reginald originally brought the property for £20,000. As he has given the property to the charity, the disposal is on a ‘no gain, no loss’ basis and there is no capital gain or allowable loss.
If instead he had sold the property to the charity for £40,000 and allowable costs had been £5,000, there would have been a chargeable gain of £15,000, which would be liable to CGT to the extent that it is not covered by his annual exemption.
It can also be tax effective to leave land and property to a charity in your will. The value of the gift is deducted from the estate for IHT purposes.
Practical Tip :
Giving land or property to charity is obviously very beneficial to the charity concerned. However, the availability of tax relief can also be beneficial to the donor, particularly if it is desirable for the donor to reduce his or her income in a tax year to preserve entitlement to personal allowances or to prevent paying tax at 50%.