Tax efficient charitable giving for the UK and US
When planning US and UK charitable giving, care should be taken to ensure that all of the available tax relief options are maximized.
With many areas needing due consideration in order to donate with tax efficiency, we have detailed a number of the points to take into account; but for individual advice on your personal circumstances, please contact us for assistance.
Consider the timing of the gift
The most advantageous time to donate to a charity for a UK resident US citizen is before 31 December and potentially before filing the UK return for the previous UK tax year (usually due by 31 January)
This can then allow the tax relief to be claimed as soon as possible after the gift for US purposes. For UK purposes the individual may also use carry back provisions and claim tax relief by reference to the previous UK tax year, if that would be advantageous.
Tax benefits may also be gained by splitting the payment between December and January, so that tax relief can be claimed in the both the current and subsequent year’s US return, and previous and current UK return, thus optimising tax relief on larger amounts.
The importance of where the charity is located to your available tax relief
Both the UK and the US have tax rules regarding charitable giving which only allow tax relief for donations to charities within that country (or in the case of the UK the EU and EEA as well). They also have very differing rules as to how that relief is provided. The UK provides part of the relief for cash donations directly to the charity and part via the annual return through the extension of the amounts on which lower tax rates apply, and the US provides relief solely by way of income deduction via the annual return.
It’s therefore important when making a donation to consider which tax jurisdiction will provide the highest rate of tax relief. This should take foreign tax credits into account, and acknowledge that the UK gift aid process allows tax relief at an individual’s marginal tax rate.
More often than not, it is more tax efficient for a UK tax resident to donate to a UK charity, as more tax relief may be claimed and any US liability would still be fully covered by US tax credits. Where large donations are made it will negate the risk of an inheritance tax charge on the donation as well.
Tax payers with both a UK and US tax liability, for example where they have ongoing US sources of income, may benefit from maximum tax relief by donating to a dual qualified US/UK charity.
However, should the charitable company hold the name of ‘US friend of’ or something similar, they will most often only provide US tax relief. In these cases, UK residents should carefully consider whether it is beneficial to use these when sourcing such charities.
For charities that do not have a dual entity, it is sometimes possible to utilise a dual qualified Donor Advised Fund such as The Charities Aid Foundation American Donor Fund or The National Philanthropic Trust. When a donation is made to them, dual tax relief is provided, and the gift is then passed on to the charity of choice after all due diligence checks have been made.
Another option is for individuals who are gifting very large funds, to set up their own private dual-qualified charitable foundation. However, administration and legal costs are considerable, and taxpayers must take into account that the US tax jurisdiction only allows 30% to be offset against a private foundation, where as 60% may be offset to a charity.
The use of offshore income and gains for remittance basis users
Some large charities hold an offshore bank account which may be utilised by current and past remittance base users looking to gift foreign income and gains. If the donation is paid directly into the charities offshore account, both UK and US tax relief is available without the need for a taxable remittance.
For smaller charities without an offshore account, a donor advised fund may prove to be the most tax efficient option and should be considered.
The donation of an asset
Tax relief may also be claimed on the donation of some specific non-cash assets, including listed securities.
And, should the asset have gained in value over the previous years, it may be advantageous not to acknowledge the taxable gain in both the UK and US jurisdictions, providing the charity has dual qualification. Here tax relief is maximized when both the tax relief and avoidance of CGT is possible.
Charitable donations upon death
When bequeathing sums to a charity in a will, it is important to consider all tax implications to maximize the tax relief for your estate.
For those domiciled in the UK, exemption from IHT is only valid on gifts to EU registered charities, and for US citizens the tax relief on a EU charitable donation is still valid providing the charity is not overtly political.
A large donation accounting for 10% or more of the net estate, will reduce the IHT tax rate by 4%, which can result in the overall saving exceeding 40%.
In addition, if the gift is made through a dual qualified donor advised fund, US tax relief will also be applicable.
A non-US domicile may also be granted tax relief on the direct donation of US based assets.
Grouping multiple contributions for tax efficiency
However, if the funds gifted are grouped and a donor advised fund is used, the ongoing gifts may still be spread out across the year if desired.