Wednesday’s Budget has introduced some very welcome and long overdue changes for charities that will make charitable giving much easier than before.  The changes will take effect in different stages between 6 April 2011 to 6 April 2013 with periods of consultation, so it will be some time before their full impact will be felt.

A brief summary of the main proposals are set out below:

Changes to take effect from 6 April 2011:

Substantial donors rule

This anti-avoidance legislation was introduced in the Finance Bill 2006 and was designed to prevent abuse of charity tax relief.  It targets certain transactions between a substantial donor and a charity,  where the so  called substantial  donor has donated either £25,000 in 12 months or £150,000 over a 6 year period. This legislation has been much criticised for both deterring large charitable donations and catching unintended transactions. 

From 6 April 2011, the following rules will now apply:

• The existing financial limits will no longer apply, so donations of any size will be considered.  The concept of “a substantial donor” will therefore disappear.

• The new rules will look at the purpose of the donation. Tax relief  will be denied  to the donor where the donor has entered into an arrangement with the charity (directly or indirectly) to receive an advantage which exceeds the gift aid donor benefit limits discussed below.  The donation will therefore be regarded as a “tainted donation”. 

The new rules are much clearer and should be easier to apply.  The primary target for the recovery of any  tax relief will be the donor, rather than the charity itself.

Gift Aid donor benefit limits

• This will be relevant to all charities including community amateur sports clubs (CASCs) that provide benefits to donors (whether an individual or a company) who make a qualifying donation exceeding £10,000.  With effect from 6 April 2011, the maximum benefit that a donor can receive from the charity on  donations exceeding £10,000 will increase from £500 to £2,500. 

• The existing rule that the benefit must not exceed 5% of the value of the donation remains unchanged.

This should act as a greater incentive for donors to give to charity.  It also  means  charities that choose to do so,  or who wish  to  thank their larger donors can  now give more back without jeopardising their gift aid relief.

Changes to take effect from 6 April 2012:

Reduced rates of inheritance tax

• For deaths which occur on or after 6 April 2012, the rate of inheritance tax(IHT) applicable to the estate will reduce from 40% to 36% if 10% or more of the deceased’s net estate (after deducting available IHT exemptions, reliefs and the nil rate band) is left to charity.  Further consultation on this major change will follow  this summer. 

This proposal will have a major impact upon individuals with potentially taxable estates for IHT purposes.

Gift Aid – online filing

• In 2012-13 HMRC will introduce a new online system for charities that will enable them to register their details for Gift Aid and also to make Gift Aid claims. 

This change is long overdue and HMRC are working with the charity sector to develop this and  to discuss what information will be required in order to reduce the administrative burden on charities.

SADonate

Under the current rules, self-assessment taxpayers due a tax  repayment from HMRC can direct that the repayment is made instead to a charity of their choice.  HMRC have reported that since this system was introduced in the Finance Bill 2005 it has not been well used and is no longer cost-effective to administer.  The SADonate system will therefore be withdrawn for repayments of tax due on tax returns for 2011/12 and subsequent years, and for any repayments made in respect of earlier tax years on or after 6 April 2012. 

The full effects of this remain to be seen, but the proposed budget changes to  gift aid should help to counter-act this. 

Changes to  take effect from 6 April 2013:

Gift Aid – records for small donations

Of all the proposed budget changes, this will have the most profound impact.  Implementation has been delayed until 2013 to  allow for consultation.

From 6 April 2013, charities and CASCs that receive donations of £10 or less will be able to apply for gift aid repayment on the amount of the donation, without the need to obtain the Gift Aid Declaration from the donor. Each charity can claim this on up to £5,000 worth of donations per tax year. 

Each charity must demonstrate the following:

• They have a tax reference number  and  have been recognised by HMRC for gift aid purposes for at least the previous 3 years.
• They have a good tax compliance record.
• They have been operating their gift aid scheme successfully throughout this 3 year period.

For many smaller donors, the completion of a gift aid declaration can act as a deterrent to giving to charity.  It also increases the administrative burden upon charities, with the result that in order to save costs, some charities find it easier not to claim gift aid at all.  From 6 April 2013 this change will therefore have a major impact upon every charity.  The only disadvantage is that the cap of £5,000 is fairly low.  We will need to see whether this is amended following the consultation period. 

Further information

We are pleased to provide any further advice which may be required. Please contact our Head of Charities Anne Swarbrick or Senior Associate Victoria J W Simpson. Both Anne and Victoria are accredited specialists in charity law.

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.