Q: Can’t I just do my giving like I’ve done in the past?
A: If you continue to give as you have given in the past, you may lose some possible tax benefits. If you give to a US charity, it will qualify as a charitable deduction on your US tax return but not on your UK tax return. If you give to a UK charity, it will qualify as a charitable deduction on your UK tax return but not on your US tax return. American families in the UK need to use a dual qualified charity to ensure a donation qualifies as a charitable deduction in both the US and UK simultaneously. By using a dual qualified charity, donors who pay taxes in both the UK and US may receive tax incentives in both countries.
Q: What is Gift Aid and how does it work?
A: Gift Aid is the UK’s unique system to provide tax incentives for cash donations (i.e. not shares or property). In the US, the donor claims 100% of the value of a donation as a deduction (tax relief) to reduce taxable income, up to applicable annual limits. In the UK, cash donations are treated differently. The donor and the charity effectively split the tax incentives through the UK’s Gift Aid tax incentive scheme. “Higher rate” (40%) and “additional rate” (45%) taxpayers claim part of the tax benefit on their Self-Assessment tax returns and the charity receives the other part of the tax benefit directly from HMRC, the UK tax authority. For example, if you are an “additional rate” taxpayer and make a £100 donation, you could claim tax relief of £31.25 on your Self-Assessment return and the charity would receive £25 in reclaimed Gift Aid directly from HMRC.
Q: Do income tax deductions (tax relief) work the same way in the UK?
A: In the UK, there are income tax incentives for donations of cash, publicly listed shares, and property. This is a narrower range of assets than those that qualify for US income tax incentives. In the US, income tax incentives are also available for donations of more illiquid assets, such as closely-held or privately-held stock, alternative investments (private equity, hedge funds), privately held interests (C-corp, S-corp, LLCs), structured notes, derivatives, and publicly traded partnerships.
Q: Does the UK have limits on the amount of tax deductions you can claim?
A: The UK does not limit the amount of income tax deductions (tax relief) you may claim for charitable giving. The US limits income tax deductions to 60% of your adjusted gross income (AGI) for cash donations to public charities and 30% for cash donations to private foundations. The UK does not have any limits. You could offset 100% of your taxable income through charitable giving.
Q: Can charitable giving lower my inheritance (estate) tax?
A: In the UK, inheritance tax is applied to estates valued over £325,000. If you leave at least 10% of your estate to charity, the UK inheritance tax rate is reduced from 40% to 36%. In the US, the federal estate tax threshold is $11 million for individuals and $22 million for married couples filing jointly. Charitable donations remain exempt from inheritance (estate) tax.
Q: What are my options for using a dual qualified charity for my giving?
A: If you have a one-time gift, you could use a dual qualified intermediary charity, like NPT Transatlantic, who specialises in providing this service. If you want to establish an ongoing giving vehicle, you could set up your own dual qualified foundation or use a dual qualified donor-advised fund. A donor-advised fund (DAF) is a philanthropic fund established under an umbrella charity, like NPT Transatlantic, that administers the fund on behalf of the donor. A DAF allows donors to make charitable contributions, receive immediate tax benefits, recommend how the funds are invested and then recommend grants from the fund over time.
Written by: John Canady, CEO, National Philanthropic Trust UK