Gift Aid is tax relief on money donated to a UK registered charity or a Community Amateur Sports Club. It is particularly useful to higher earners as you can claim tax relief at your marginal rate and shield part of your income from higher rate tax. It may be a good way of limiting your taxable income to £100,000 when the new 50% tax rate is introduced on 6th April 2010. On the other hand, Gift Aid is not suitable if you have a very low income because if you sign a form allowing a charity to claim a tax credit on your donation and you do not actually pay tax that year then you will be liable to repay the tax credit to the Revenue personally. Therefore, if you make regular Gift Aid donations under a deed of covenant, you should inform the charity at once if you do not have any taxable income for a particular year.
Gift Aid works by allowing a charity to claim a tax credit from the Government on all donations made under the scheme. For a basic rate taxpayer it makes no difference to their tax liability, but anyone paying higher rate tax can claim an extra 20%. The grossed-up donation is added to the higher rate threshold for that year and reduces the amount of income taxable at the higher rate. An amount equivalent to the grossed-up donation is taxed at the basic rate instead, so in effect it acts as a tax shelter.
To claim Gift Aid you must give the charity a declaration, which may be written, on-line or even verbal if it has been taped, showing your name, address, the name of the charity, details of the donation saying it is made under Gift Aid and confirmation that you are a taxpayer. A declaration can be made to cover individual donations, a series of donations and all future donations. They can also be back-dated up to 6 years. On your tax return, you simply enter the actual amounts paid (not the grossed-up figures) in Box 5 on page TR4. There is no need to list the charities unless the Revenue sends you Form P810.
When a charity makes a claim for repayment of tax credits, it completes a form listing the donors, amounts donated and dates of payment. Donations of less than £10 can be aggregated so there is no need to list each individual donor. However, it is still necessary for the charity to have a declaration from each donor. Therefore, it follows that you cannot claim Gift Aid on your tax return unless the charity received a formal declaration from you. This will tend to exclude money put in collection boxes like the Poppy Day Appeal as people very rarely stop and give their name and address.
Donations must also be in money, not in goods or services, and no benefit must be given to the donor unless it is:
a) a token acknowledgement of generosity;
b) literature describing the work of the charity;
c) a right of admission to view charity property; or
d) valued below certain financial limits.
Donations must be at least 10% more than an admission price to qualify as exempt and allow admission for at least a 12 month period. For this reason many attractions owned by registered charities such as Hampton Court Palace give you the opportunity to pay a small additional fee in order for the whole admission price to qualify as a Gift Aid donation. Donors must also be made aware that the extra 10% is entirely voluntary, and they must have exactly the same rights of entry as visitors paying the normal admission price. The admission must be for the purpose of viewing charity property, such as land and buildings, artefacts, works of art, plants, animals and scientific instruments. It must not be for a performance such as a theatre production or film show, although it is permitted to view property where such performances take place.
For a benefit to be exempt it must also satisfy the relevant value test and the aggregate value test. For example, it cannot exceed 25% if the donation was up to £100 or exceed £25 if it was between £101 and £1,000. Also, no individual donor may receive benefits exceeding £500 in a tax year in order for donations made by that person to qualify for Gift Aid. The value of the benefit is based on the value to the recipient, not the cost to the charity which may include discounts. If a benefit does exceed these limits, it is possible to split the donation between an amount to 'buy' the benefit and the remainder to be treated as a gift.
A useful tax planning point to bear in mind on Gift Aid is that you can backdate donations on your tax return to the year before. This may be useful if you have income taxed at higher rates in one year but not in the following year. It is also worth noting that you can claim tax relief for certain assets gifted or sold at less than their market value to a charity, although this is not actually covered by Gift Aid. Such assets include land and buildings, qualifying shares and securities or an interest in an off-shore fund.