It has recently been reported that the income of UK charities from legacies reached its highest-ever level last year. Over 120,000 gifts were made from more than 36,000 estates, with charities receiving legacy income of more than £2.8 billion. But what about those who would prefer to donate during their lifetimes? 

Most UK taxpayers are aware that “gift aid” relief is available on lifetime charitable gifts of money by UK taxpayers. The charity can claim an extra 25p in each pound, which enables the individual to increase the amount of their gift to the charity without having to pay more. There is an additional benefit for higher-rate and additional rate taxpayers who can claim higher-rate or additional rate relief on their donations. However, fewer people are aware of the favourable reliefs that are available for gifts of land and buildings. These reliefs can be very valuable to a would-be donor who is asset rich but cash poor. 

Capital gains tax relief on the gift

The starting point is that the donor is not required to pay capital gains tax on the donation. This is therefore a saving of up to 28% of the increase in value of the property.  

Income tax relief

In addition, the taxpayer is able to offset the value of the gift against his or her taxable income, therefore reducing the individual’s total income tax liability (or the company’s liability to corporation tax).  

This relief is available on the gift, or sale at an undervalue, of a “qualifying interest in land”. The land must be in the UK, and can be either a freehold interest or a leasehold interest which is a term of years absolute.  

Although some charities may prefer a gift of cash, land can be very useful

Although some charities may prefer a gift of cash, land can be very useful. For a newly-formed charity, a gift of property can set the charity up with a significant asset. Provided the gift is an outright gift of land or buildings, there is no SDLT payable. In addition, if the charity subsequently sells the asset, there will be no CGT liability provided any proceeds of sale are used for charitable purposes. 

Example

Maurice lives in London, and inherited an office building in Mayfair about eight years ago. He has long been involved with an arts charity that has recently started searching for a location for an art gallery in the area. Maurice decides that he would like to donate the office building to the charity, which is very enthusiastic about the proposal.  Not only will the charity be able to open the public art gallery it has been longing for, but it will also have office space for all of its staff.   

A qualified property agent values the office block at £5,000,000, an increase in value of £1,000,000 since Maurice inherited. Maurice pays £10,000 for the valuation and various other legal fees. The charity is very grateful and gives Maurice tickets to a gala dinner worth £5,000 to show their appreciation.  

The relevant value of the net benefit to the charity is worked out as follows:

Therefore Maurice will be able to reduce his taxable income for the tax year in which he makes the gift by £5,005,000. In addition, there will no CGT payable on the disposal of the land, which is a saving of 28% on the chargeable gain of £1,000,000.  

Traps 

The whole of the beneficial interest in the land must be disposed of. If you own land jointly, or in common, with one or more other people, relief is only available if all of the co-owners give their entire interest to the charity. Similarly, you cannot give your house to a charity but then continue to live in it.    

To prevent the relief being used for tax avoidance, if the donor (or a connected person) becomes entitled to any interest or right in relation to all or part of the land donated within a specified period, all entitlement to the relief can be withdrawn and any tax due can be recovered by assessment.  

Selling the land on behalf of the charity

Some charities will not be in a position to hold land and so would prefer to sell the land. It may also be preferable for the donor to be responsible for the sale, particularly if he or she has particular knowledge or experience of the relevant market.  

From the charity’s perspective, a cash gift of the sale proceeds would allow the charity to reclaim gift aid. However, for the donor, the treatment may not be as beneficial as a gift of the land:  the individual would be liable for CGT at a rate of 28% on any chargeable gain and would only be able to claim higher-rate or additional rate relief on their donations.

In order to allow the donor to take advantage of the relief for gifts of land, whilst still allowing the donor to sell the property for the benefit of the charity, one option is for the donor to declare that he holds the land on bare trust for the charity. This is a gift of land and qualifies for relief. At the same time, the donor will also agree to enter into a contract for sale, to provide standard pre-contract Replies to Enquiries (and respond to additional pre-contractual enquiries) and to warrant the Replies to Enquiries in the contract for sale for the benefit of the buyer and the charity.  

The charity will then direct the donor to transfer legal title to the buyer of the land, in accordance with the contract for sale. 

From the charity’s perspective, although gift aid is not available in this context, the advantage is that it will receive the proceeds of sale of an asset which the donor might not otherwise have given away. 

Inheritance tax relief

Even if the donor dies within seven years of making the gift, there will be no inheritance tax liability (unlike for other gifts) as gifts to charities are exempt from inheritance tax. 

Claire Weeks is Senior Associate and Sophie Wettern is Associate at Maurice Turnor Gardner LLP