Originally introduced by HMRC in 1990, Gift Aid allows charities to reclaim basic rate tax back from the government on every qualifying donation. The donor can claim basic rate relief for the value of the donation. If you are a higher or additional rate taxpayer this has the effect of increasing the band at which the higher rates are paid. It also increases the threshold at which you begin to lose your personal allowance (worth noting if your income is in excess of £100,000).
Gift Aid can only be claimed on genuine donations and not in exchange for any service or item – this is why you pay slightly more on a ‘Gift Aid’ ticket entry to a National Trust attraction – an element will be for the ticket, the rest will be a donation.
It is important to note that a declaration must me made in relation to the donation – this means the charity can reclaim the tax and the taxpayer can claim relief.
Gift Aid cannot be claimed on donations:
- From limited companies
- Made through payroll giving
- Made in exchange for good or services
- In exchange for a benefit (over a certain limit)
- Of shares
- From charity cards or of vouchers
- Of membership fees
There are two major pitfalls that you should be aware of. Firstly, you must have paid enough tax in the year that HMRC can pay it over to the charity. If Gift Aid claims exceed the total tax paid HMRC will reclaim those funds from you directly. Secondly, the relief must be claimed either in the tax year that it is paid, or (if paid in the following tax year), in the tax return for that prior tax year. HMRC will not accept an amendment to a return in order to claim the relief.
Accurate records of donations and gift aid claims should be retained (by both the donor and the charity), HMRC do not look kindly on those looking to exploit the system.
As discussed in our recent article, gifts of any kind may be subject to inheritance tax. Gifts to charity are specifically exempted and where the taxpayer donates more than 10% of their estate on death to a charity the rate of IHT applied to their remaining estate is reduced to 36%.