It is during the festive season that we often think of those less fortunate than ourselves. In December charitable giving increases as we all recognise the massive need in society to help those that otherwise can’t help themselves.
I recently had the privilege of working with an existing client who approached me with a view to undertaking some significant charitable giving. They had identified a project they were passionate about and wanted to commit a large amount of capital to it.
With this in mind, as their financial planners, our first task was to consider and work with them to determine whether they could afford to make such a gift without compromising their other goals and priorities. We reviewed their income, expenditure and net margin and their overall net worth. We identified that whilst their net worth would inevitably fall in the short term, over the rest of their lives their other goals were still affordable and they could therefore make the desired gift to their chosen charity. They were delighted.
Having determined that they could in fact afford to make such a gift, the next step was to review their cash balances and their investment portfolio to decide which assets should be realised in order to make the gift.
With the aim of tax efficiency, we advised them to make the gift from their investment portfolio rather than give out of cash. The investments ultimately selected were those carrying large capital gains. Having selected the appropriate investments, the clients went ahead and transferred the funds to their chosen charity. The charity then sold the funds and no capital gains tax became payable on the disposal of these funds.
For these clients, the full intended value of their gift was passed to the charity, no capital gains tax will need to be paid, the capital gains tax liability on their remaining portfolio has been reduced and they could also claim income tax relief on the gift. They were understandably pleased with this outcome.
To illustrate this point further let’s take a fictional example. A client, Mr Smith, with income of £250,000 wants to make a gift to charity of £100,000. On the advice of his financial planner, Mr Smith decides to do this, using funds with the largest capital gains from his investment portfolio worth £1,000,000. The gains on the £100,000 of funds chosen total £21,000, as the funds have been invested for many years. The funds are then legally gifted and transferred to the charity and the charity then sells the funds for £100,000, which achieves Mr Smith’s goal.
When submitting his tax return, Mr Smith enters the gift of funds as a gross gift and this reduces his taxable income to £150,000. This saves him £45,000 of income tax for the tax year in question. He also does not have any capital gains tax to pay on the disposal of the funds. As the taxable gain was potentially £10,000 above his annual allowance of £11,000 for the 2014/15 tax year, he would have paid tax at 28% or £2,800 on this gain. In this scenario the charity has therefore benefitted by £100,000 at a nominal cost of £52,200 for Mr Smith.
When giving to charity it is always worth considering the gift of investment assets first, as these can often achieve more ‘value’ for each pound given than the same amount in cash. In the ultimate altruistic scenario, the tax efficiency of gifting in one year allows further on-going gifting in the next. In summary, a great benefit for both the charity and client alike.
RMT Ref 91/12.14/SL