DONATING FOR LONG-TERM GOOD: Thinking Beyond Cash
Although simply “giving cash” is the most popular way for people to donate to charity, there are other ways to make gifts both during your lifetime and after death.
Payroll giving allows you to have donations paid to a nominated charity deducted from your gross wages. This provides an immediate saving to Income Tax, with the full amount going to the charity as well.
Alternatively, donations using Gift Aid allow the charity to claim tax relief on the cash donations too at a rate of 25p for every £1 given. This boost comes at no extra cost to you, although you must have paid the same amount or more in tax during that tax year.
For those who pay tax above the basic rate can also claim the difference between the rate they pay and the basic rate on the donation.
In addition, all charitable gifts made during your lifetime are exempt from Inheritance Tax (IHT).
On death, if you leave at least 10% of your net estate to charity in your will, any Inheritance Tax that does fall due on the remainder of your estate is charged at a reduced rate of 36%, rather than the usual IHT tax rate of 40%. The portion gifted to charity is also exempt, so this can be an effective way of reducing the value of your estate for IHT purposes.
For many of us, pension wealth makes up the majority of household wealth. Pension money may therefore appeal to scheme members as a seemingly convenient source from which you can support your chosen charitable causes.
The “lifetime allowance” for maximum pension savings accrual (formerly £1,073,100.00) has recently been abolished by the current Government which was broadly welcomed (albeit this may be subject to change in the event of a change of government).
The downside of the lifetime pension savings allowance being abolished was that two new “pension limits” were introduced with regard to the tax-free cash sum element that can generally be paid (a) during one’s lifetime and (b) on death from an approved pension plan/scheme.
The tax-free cash sum lifetime limit (“Lump Sum Allowance”) on lifetime payments has now been capped at £268,275.00 (with higher values available to those with relevant historic “protections”).
The limit on any death benefit payments (“Lump Sum & Death Benefits Allowance”) has now been capped at £1,073,100 (again, with higher values available to those with relevant historic “protections”).
Any payments in excess of these new tax-free cash sum limits will simply be taxed as earned income under PAYE (like any other pension payment).
This whole topic is quite complex and independent advice should be sought before taking any action.
Please note; these new tax-free cash allowance rules may still be subject to amendment as HMRC have not fully formalised all the rules and regulations as yet.
Gifting such pension assets (in full or in part) directly to charity seems like it would be a straightforward solution and there are a few options available to those who are keen to donate all or part of their pension plan funds to any charity.
Finally, you can always gift to a charity various other valuable assets such as;
land
houses
other buildings and property
antique items
individual stocks and shares portfolios
works of art
There are favourable HMRC approved schemes designed to assist in gifting some items (such as stocks and shares portfolios and valuable works of art) and these can best be explored via a solicitor as these matters are too complex to cover in any real detail here.
Pension income and lifetime gifting
Payroll giving isn’t limited to just salary or wages. If you are receiving pension income via PAYE it may possible to make use of payroll giving to make donations to your preferred charity or charities.
As with payments from salary or wages, the deduction is made before tax. The deduction is then paid to a “Payroll Giving Agency”, which pays the funds to the member’s chosen charity.
The issues here are;
You must be aged 55 or over to access your pension plan / scheme.
A further point to consider is that, if income is paid through flexi-access drawdown, the money purchase annual allowance will be triggered. This would limit your future ability to build up substantial pension savings.
The costs and complexities of these arrangements can make it challenging to find pension providers that will facilitate them.
Pensions and gifting after death
Charities can be the recipients of an authorised lump sum death benefit payment from a pension scheme.
If the member was aged 75 or over when they died, or if the member was under 75 but the payment was not designated to someone until more than two years after the date the scheme was aware of (or should reasonably have been aware of) the member’s death, the payment(s) will be taxable.
As charities are generally set up as either trusts or a companies, they are deemed “non-qualifying persons”, and generally tax will be charged at the special lump sum death benefit charge rate of 45%.
However, IF certain conditions are met, the lump sum may be paid as a “charity lump sum death benefit”. A charity lump sum death benefit is paid tax-free, so the special lump sum death benefit charge does not apply.
A charity lump sum death benefit may only be paid from money purchase arrangements. It can be paid following the death of a member of a money purchase arrangement where:
there are no dependants of the member; and
the member has named and nominated the charity as a plan beneficiary.
If the member leaves no dependants, but hasn’t nominated a charity, a lump sum cannot be paid as a charity lump sum death benefit. The lump sum also won’t qualify if the member has nominated a charity but there is a living dependant.
On the death of a beneficiary who is a dependant, nominee or successor under a money purchase arrangement, a charity lump sum death benefit can be paid where:
there are no living dependants of the original member at the time of payment; and
either it is paid to a charity nominated by the deceased member or, if the member did not nominate a charity, it is paid to a charity nominated by the deceased beneficiary.
Whether or not the deceased beneficiary had any dependants isn’t relevant.
So long as the payment is used for charitable purposes, it will generally be tax free irrespective of the age of the member at the time of their death.
Obviously, it is vitally important to strike a balance between lifetime gifting and ensuring that enough remains available for you to feel secure in your retirement (until the very end).
Whilst the options for using pension funds for charitable purposes are quite limited, they are worthy of consideration, particularly as pension savings are often one of the largest assets retired persons have.
Life Insurance and charitable donations
Nearly £7 Billion was paid out in life insurance claims to UK insurance policyholders in 2021 alone so by any measure life insurance is a huge asset class that people thinking about charitable giving should seriously consider.
Life insurance is traditionally purchased for many reasons albeit mainly to provide security for family and loved ones (as well as many others) both for personal and business reasons.
Life insurance is an especially flexible planning tool that can be used to meet a variety of financial needs.
But did you know that life insurance may also be a very effective way to fund a serious legacy-sized charitable gift?
For example, ask yourself the following questions to determine whether a gift of life insurance could play a role in your charitable giving arrangements:
Do you wish you could give more to charity?
Do you have an old life insurance policy on your life that is no longer needed for it’s originally intended purpose?
Do you have a life insurance policy to protect a business that no longer exists or that no longer needs such protection?
Although many people have un-needed life insurance plans, they are often wasted and lapsed or cancelled.
Therefore, consider whether any of these simple ways to use life insurance plans to donate may be an opportunity to create or enhance your charitable-giving legacy.
Name a charity as a named beneficiary of a life insurance policy you already own.
Take out a new life insurance policy to simply donate some (or all) of the policy proceeds to your preferred charity to help fund an endowment, or a gift that generates an on-going stream of income.
Give a paid-up life insurance policy you may have in force which may have an accrued surrender value already to your nominated charity.
Before doing anything formally (to your, or your family’s, possible detriment detriment) you should preferably seek financial advice.
IMPORTANT NOTE
Reasonable care has been taken to ensure that the information provided in this article is up to date and accurate.
The information obtained from all sources are believed to be reliable.
The information in this article is provided solely for general information and should not be regarded as a solicitation or any other form of advice, or as an offer or a recommendation to buy, sell or otherwise deal (acquire or dispose) with any particular investment and/or service.
Always remember that the past performance of any investment must not be taken as any guide to its future returns. Plus, the value of investments and the income from them can go down as well as up.
The information contained in this article is based upon current understanding of UK legislation and UK HMRC tax practice, which often changes each Tax Year.
The level of any tax benefits and liabilities will depend on individual personal circumstances and may change in the future.
Exchange rate fluctuations may cause the value of underlying overseas investments to go down as well as up.
Prepared by a UK FSA 06/24
