The latest in my series of proposals that will make up the Taxing Wealth Report 2024 has been published.
In this latest note, I consider the need to restrict tax reliefs for donations to charities in situations where they might be abused. This might apply most particularly to inheritance tax but could apply equally to income tax gift aid donations and to gifts to charities where capital gains tax reliefs are claimed.
The summary of this note says:
Brief Summary
This note proposes that:
- Tax reliefs available for gifts to charities should be restricted in all cases, including for inheritance tax, where any of the following arise:
- A material personal gain arises as a result of the gift, even if only by reason of overt publicity.
- That some degree of control over the gift or the donated asset has been retained.
- The charity favoured by the gift had not distributed more than 80 per cent of its revenues for charitable purposes in the five years preceding the donation or in the three years following it.
- Measures to achieve these goals should be put in place as a targeted anti-avoidance rule for tax purposes.
- The purpose for making these changes is not to raise revenue (although some savings in relief given may arise) but is instead to:
- Prevent tax abuse.
- Prevent the tax system from being used in combination with charitable structures to perpetuate the current unequal division of wealth within society.
- Encourage good governance on the part of charities.
- Protect the charitable sector as a whole from abuse, meaning that all well-managed charities gain from these proposals.
Discussion
The reasons for this proposal are:
1. To reduce the incentives to avoid inheritance tax and other taxes by using the reliefs available for gifts to charities.
2. To close tax gaps.
3. To encourage charities to make use of donated funds on a timely basis.
4. To support good governance in the charitable sector.
The behavioural responses to this recommendation cannot be known for certain. What can be guaranteed is that the vast majority of donations to charities will be unaffected by this proposal. What will be affected are:
- Donations from which the donor seeks to secure publicity e.g. by securing the naming of a facility in their own honour.
- Donations where the owner retains control of an assets after the gift has been made e.g. as a result of gifting the ownership of share in a company into a charitable trust where control of the board of directors of that company is retained by the donee after the gift has been made.
- Gifts to charities that are reluctant to make use of funds donated for charitable purposes, suggesting that they never had need for tax relief in the first place.
The measure is, therefore, an anti-abuse rule to restrict the availability of tax reliefs in all taxes, but which may well have most significance in the case of inheritance tax.
No estimate of tax savings that might result from these proposals can realistically be made.
The more technical aspects of the proposal are referred to in the supporting note.
Cumulative value of recommendations made
The recommendations now made as part of the Taxing Wealth Report 2024 would, taking this latest proposal into account, raise total additional tax revenues of approximately £105.2 billion per annum.
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Great work and much to think about.
There is nothing worse than altruism to one’s self.
As I understand it the amount of tax relief on charitable giving, as with pension contributions, depends on the donor’s income tax rate. I was expecting to see tax relief limited to the lowest rate of income tax.
I have already proposed that in a separate note.
While it is obviously right to prevent abuse of the tax system, this suggestion does seem different from your others in that it isn’t clear that it will actually raise more tax (and more importantly help the taxation system act as a rebalancing influence in society).
I can see that a gift is not really a gift if the donor retains benefits. But while on the face of it you want a qualifying charity to be focussed on its good works, I am unclear about your 80% criterion. For example, some big charities like Oxfam run large numbers of high street charity shops which presumably incur considerable operating expenses even if on balance they raise money – if that is properly reflected in the charity’s accounts they may well be spending more than 20% of net income internally. And the requirement including the 3 years accounts after donation to be assessed seems to be quite tough too: I was executor for my mother’s will which included a number of specific charitable bequests which were excluded when calculating IHT liability. It would have left me with a big problem if there had been a retrospective tax charge three years after distributing the estate.
I am not sure I follow the logic of your opening paragraph.
It may well raise tax but I do not know how much so I did not make a suggestion.
And its whole purpose is to prevent the use of charities to perpetuate division in society.
And Oxfam is engaged in charitable fundraising activity when running shops.
Let’s be clear: this is an anti-abuse rule. I am quite sure none of your mother’s bequests came anywhere near triggering the ‘gigts with reservation’ rule I suggest as a trigger for its use so you would have been completely untroubled by this rule.
99.5% or more of donors will be. But that does not mean it is not an issue.
I principle, this is correct and, in some senses, already the case. If I claim “Gift Aid” I have to warrant that I am not getting anything in return.
However, this is abused. A while ago I made myself unpopular on this issue with a local very worthy charity – being a banker and fiddling taxes is a career ending move.
Genuine question. I wonder whether better enforcement of this rule (along with some “case law”) is all that is needed?
Gift aid is massivly abused – I can never see how I can get entry into a charity’s site or ride on its steam train and claim tax relief for doing so.
So the law does need clarification.
BUT, I am targeting much more sophisticated abuse here.