The ongoing economic challenges that face individuals and businesses alike are placing a greater strain on charities.

Many of the measures that can be taken by private enterprises to offset rising costs are unavailable to charities, as the end user of the service is unlikely to be able to be charged more for the service in the way that a shop may increase prices.

As such, it is up to the spirit of philanthropy that resides within individuals to tackle this issue.

With a better understanding of Gift Aid and an awareness of how charitable donations offset Inheritance Tax (IHT) exposure, you may be better positioned to support good causes.

How does Gift Aid work?

Any individual in the UK who pays Income Tax or Capital Gains Tax (CGT) can use Gift Aid as a means to support good causes while also potentially receiving some benefits for themselves.

Donating through Gift Aid allows charities to claim an extra 25p for every £1 that you donate, ensuring that your donations are 25 per cent more effective.

As the cost of operating increases, this additional amount of revenue can be vital in keeping a charity able to continue doing its work.

There are some limitations to Gift Aid that need to be understood so that you do not accidentally breach the rules.

Donations only qualify for Gift Aid where the value is less than four times what you have paid in the tax year and if you no longer pay tax then you cannot continue to use Gift Aid.

You will need to sign a Gift Aid declaration to ensure that the charity is able to make the most of your altruism.

If you are a Higher rate or Additional rate taxpayer, you can claim back the difference between the tax you pay on the donation and the amount given to charity – meaning that 20 per cent or 25 per cent is recovered, depending on your tax rate.

This enables you to get some slight tax relief by extending the Basic rate tax band and can mitigate a portion of your overall tax bill.

You will need to contact HMRC to amend your tax code, or you can handle the relief through your Self Assessment tax return.

Self Assessment tax return enables you to get relief sooner through Gift Aid, as you can declare donations made in the current tax year provided they occur prior to you filing the return.

Does giving money to charity mitigate Inheritance Tax?

Charitable donations made in your lifetime, as well as any factored into your Will, can change how your estate is valued for IHT purposes.

Unlike with other gifts that are subject to the seven-year rule and incur a tapered rate of tax, gifts to charities are immediately placed out of scope for IHT.

If you leave more than 10 per cent of your estate’s value to charity, you get to pay a reduced amount of IHT of 36 per cent compared to the standard 40 per cent.

As the value of estates can differ between when plans were made and when they are calculated, it is important to factor in this shift when writing your Will and structuring your estate.

The donations that you have made in order to utilise Gift Aid will be exempt from IHT, so the relief offered through this approach can be twofold.

Supporting charities while strengthening finances

Research indicates that there are six million fewer donors compared to 10 years ago and this makes the situation for charities more difficult.

At the same time, 28 per cent of those who do not donate say they have little interest in charities, a figure that rises to 49 per cent of those who are Higher rate and Additional rate taxpayers.

Knowing that being charitable can help your own finances as well as those of organisations doing good work may inspire you to reconsider your view on charities.

Our team of accountants is here to help individuals manage their finances and tax exposure while also assisting charities with the cost of operations.

If you want to do good while managing your own money, get in touch with our team today.