Charity and the taxman's tender mercies

Q & A: Most of us put our cash in tins, but there are ways of giving that cost less and help more
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The Independent Online
BE more charitable. The good thing about converting that resolution into financial reality is that, with planning, you can reduce the pain through various tax-efficient ways of giving.

Q: What is wrong with simply putting money into a charity collecting box?

A: Charities are always pleased to receive coins and notes placed in their collecting tins. But many would be happier if you gave in a more organised way. Planned donations are likely to mean you give more than through one-off spontaneous bursts of generosity, they can be tax-efficient, and they help charities' own planning.

Q: What does "tax-efficient" mean?

A: Basically, it increases the value of the donation you make and can also reduce the cost to you. For example, under payroll giving, regular donations are deducted from your salary and paid direct to your chosen charity. Deductions are made from gross pay, before your tax is worked out. So in the current tax year, a donation of pounds 5 a month from gross pay costs a basic rate taxpayer only pounds 3.75 from net pay, and a higher-rate taxpayer pounds 3. At present you can give pounds 900 a year under payroll giving. This rises to pounds 1,200 on 6 April. But you can give to charity in this way only if your employer runs a payroll giving scheme.

Q: So what if there is no scheme at work?

A: An alternative for regular donations is to give by covenant and there is no limit on the amount you can give in this way. Donations under a deed of covenant must be set up to last for more than three years. The charity can reclaim the basic rate tax you have paid. For each 75p you give, the charity can reclaim 25p. You must be at least a basic-rate taxpayer for this method to work in a tax-efficient way. Higher-rate taxpayers can also claim back the extra 15 per cent tax on covenanted donations to charity, reducing the net cost to them.

Q: But supposing I want to make one-off gifts: are there tax-efficient options?

A: If you are flush with cash and do not want to make a commitment, gifts can also be tax-efficient. Under the Gift Aid scheme you can make gifts of at least pounds 250 and the charity can reclaim the basic-rate tax you have paid, increasing the value of a pounds 250 donation to pounds 333.

Higher-rate taxpayers can claim the extra 15 per cent back through their tax return, reducing the cost of a pounds 250 donation to pounds 200.

Your chosen charity should be able to explain the procedure for making sure a one-off gift qualifies under the Gift Aid scheme.

Q: What if I do not want to give the money to just one charity?

A: Under the terms of any of the three named schemes you can make your tax-efficient gifts to the Charities Aid Foundation (01732-771333), a body which is itself a charity but which acts as a clearing house for other charities. The money goes into your own charity account, and you are given a "cheque book" and a "debit card". You then make donations to other charities and can even put a "cheque" in a collecting tin.

Q: Are there any other tax-efficient ways to give to charity?

A: Yes. People who would incur a capital gains tax bill on the sale of certain assets could give those assets to a charity. This could apply to shares, for example. So if you are in a position to make a substantial donation of, say, pounds 5,000, you could give pounds 5,000 worth of shares on which you have made a gain.

You get rid of the tax liability along with the shares and therefore in effect reduce the cost of making the same donation. The charity will not be liable to capital gains tax if it sells the shares.

Q: Does a similar benefit apply when you leave things in your will?

A: Yes, absolutely. Gifts to charity from your estate after you have died (and during your life) are exempt from inheritance tax. Not surprisingly, a number of charities publish leaflets on the importance of drawing up a will in the hope that you will leave something to them.

Q: Some credit cards promise to make donations to charity. Is there a catch?

A: Not really. Credit cards linked to charities are known as affinity cards.

Usually there is a one-off donation by the card issuer of pounds 5 when you sign up and a continuing donation of, for example, 20p for every pounds 100 you spend on the card (excluding cash withdrawals). Affinity cards allow charities to benefit from your spending at no cost to you, provided that you are not paying higher interest than on other credit cards.

Co-op Bank, Bank of Scotland, Halifax, Midland Bank and Royal Bank of Scotland are among the leading providers of affinity cards. Some cards are also used to help raise money for non-charitable interest groups.

For example, the Co-op Bank has a Labour Party card and Liberal Party card, while the Royal Bank of Scotland has a Conservative Party card.

q Questions and answers compiled by Anthony Bailey.