With a recent report suggesting charitable donations were down 54% last year1 because of cost-of-living pressures, many charities are now looking for additional ways to generate income.
One source of funding that is somewhat overlooked is donations of investments from individual donors. Donating investments can be a tax-efficient way of supporting charities, and it has become more so following changes to capital gains tax (CGT). This article highlights these tax advantages and how charities can leverage them to increase their fundraising.
How capital gains tax works
As you will be aware from your charity’s investment portfolio, charities are exempt from CGT. For individuals, however, CGT is levied on the profits (‘gains’) made when selling, gifting, transferring or exchanging certain assets. These assets include shares, collective investments, personal possessions (worth £6,000 or more), and property that isn’t the individual’s main home.
CGT is only paid on gains that exceed an individual’s annual CGT exemption, not on the total value. Higher and additional rate taxpayers pay CGT at 20%, rising to 28% if the gains are from residential property. For basic-rate taxpayers, these rates are 10% and 18%, respectively.
Changes to the CGT exemption
The CGT exemption was slashed in April 2023 from £12,300 to just £6,000, and it will be reduced again to £3,000 in 2024/25. This regime is clearly far more restrictive, and represents the first time in 35 years that the level has reduced year on year, to the lowest point since 1981.
In addition, some commentators believe the CGT rates described above, which are notably lower than the comparable income tax rates, are likely to increase in future in an attempt to boost the government’s finances.
This has significant implications for individual investors. As unrealised capital gains accumulate within taxable investment portfolios and tax-free allowances decrease over time, managing assets without incurring tax becomes increasingly challenging.
Similarly, the annual dividend allowance (the amount an individual is allowed to receive tax-free from dividends) halved from £2,000 to £1,000 in April 2023 and will half again to £500 in April 2024. These changes mean a greater proportion of the income generated from stocks will also be subject to income tax.
The choice between incurring tax liabilities today or holding assets in anticipation of a more favourable tax regime presents a conundrum. However, amidst these changes lies an opportunity to support charitable causes through the gifting of investments.
Unlocking the power of donating shares
A tax-efficient strategy for donors seeking to optimise their philanthropic endeavours is to donate investments which would be subject to taxable capital gains. An individual would enjoy two significant tax reliefs for doing so:
- The primary benefit is that there is no CGT for the individual to pay on land, property or qualifying shares donated to a charity. A higher rate taxpayer is therefore able to donate up to an additional 28% to a charity, when compared with selling the asset in their own name and then subsequently deciding to transfer the cash to charity.
- Additionally, income tax relief is available: donors can pay less income tax by deducting the value of their donation from their total taxable income in the ‘charitable giving’ section of the self-assessment form in a given tax year. If the value of the gift exceeds taxable income, it may be more beneficial to consider Gift Aid options.
Maximising charitable contributions
Charities are not subject to CGT upon the sale of donated shares or property. Once the transfer of these assets to the charity is completed, they can either be sold or held to use the income generated to further the charity’s mission (assuming, of course, that the asset complies with the parameters of the charity’s Investment Policy Statement – most notably its ethical investment policy).
The process of a donor transferring shares into a charity portfolio with RBC Brewin Dolphin is straightforward – especially given the vast majority of private shareholdings are now held electronically, rather than as certificates. Once we are notified of the donor’s intentions, our dedicated transfers team liaises with the donor’s investment manager, facilitates the transfer and then manages the investment according to the agreed strategy.
Seeking professional advice
Navigating the intricacies of tax regulations and optimising charitable giving requires careful consideration and, potentially, professional advice for the individual. Every individual donor’s personal tax situation will of course be different. Many individuals will, for example, hold investments in tax-efficient vehicles such as ISAs or pensions that don’t attract CGT, where these observations are less relevant.
Nevertheless, the recent changes to the UK’s tax regime, particularly the reduction in the CGT allowance, have prompted a need for individuals to re-evaluate the tax-efficiency of their investment strategies and therefore their options for charitable giving. By harnessing the benefits of donating shares to charities, individuals can make a lasting impact while enjoying tax advantages – and it is important charities are well equipped to make potential donors aware of this.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd.