HMRC now allows charities to claim gift aid on waived loans if specific conditions are met and the donation is gift aid eligible. Find out how to get it right and structure the gift to maximise the benefit to donor and charity.
It is not as uncommon as one may at first glance think, for a charity to receive a medium to long term loan from a supporter. For example, as well as arising in the general philanthropy space, member loans to churches undertaking major projects such as a building purchase, development or refurbishment are fairly common.
Historically, if the lender wished to convert all or part of their loan into a gift, it would only qualify for Gift Aid relief if the sum lent was repaid to the lender and then gifted back to the charity. This was in order to meet the ‘payment of a sum of money’ requirement for Gift Aid qualifying donations (s416(2) Income Tax Act 2007). But this process is both cumbersome and risky for the charity in that the lender may change their mind or otherwise decide not to gift the sum repaid back to the charity.
Following representations by the Charity Tax Group (CTG) during the course of the recent pandemic, HMRC changed their view both in relation to loan waivers and waived refunds of the cost of tickets for events subsequently cancelled by the charity. They now accept that the requirement for the payment of a sum of money is satisfied when the loan is originally paid or the ticket is purchased. However, the charitable gift is effective on the later date when the loan is formally waived or the right to repayment of the ticket price is given up.
For a waiver of a right to repayment of a loan to be effective, HMRC expect there to be a legally enforceable document in place (such as a deed) and CTG will shortly be publishing model documentation for this purpose. More details of HMRC’s expectations for a Gift Aid donation to be effective for both loan waivers and waived repayments can be found in their recently updated guidance, which includes worked examples and has been produced with input from CTG.
Tax planning
There are opportunities to plan tax effective charitable giving using a loan and subsequent loan waiver. For example, if an individual receives a large bonus or maybe an inheritance they may not want, or feel able to give it to charity all in one go, they may not have sufficient ‘tax to cover’ the full amount in the year of receipt. By making a loan to their chosen charity, the charity can benefit from the cash flow immediately, whilst any gift and associated gift aid can be split over several tax years by successive loan waivers, according to the individual’s circumstances.
The CTG template waiver documentation will help to keep the process relatively straightforward.
An example of spreading tax relief (assume 2022/23 tax rates and allowances apply to both years)
An individual who has an adjusted net income in this and the next tax year of £125,140 was in a position a few years back to lend a charity £40,000. They do not need the funds and decide to waive repayment and sign a Gift Aid declaration in favour of the charity.
If they waive the £40,000 on 1 April 2023, and treat this as Gift Aid, their gross gift is £50,000. As a result, their tax liability will fall from £42,516 to £27,488, a saving of £15,028. The charity will be able to reclaim a Gift Aid repayment of £10,000.
However, if they waive £20,000 on 1 April 2023 and another £20,000 on 6 April 2023, their tax liability in each of the two tax years will fall from £42,516 to £32,516, a saving of £20,000 in total, and the charity will be able to reclaim £10,000 in total. This results in an increased tax saving for the donor of £4,972.
The taxpayer benefits from the same higher rate relief on their Gift Aid donations. But by splitting the Gift Aid loan waiver over two tax years, they receive income tax personal allowance for two years rather than just one. The personal allowance is otherwise withdrawn as a high earner.
This example serves to demonstrate the significant potential for a lender to benefit from Gift Aid through a properly executed loan waiver. But, as usually is the case with tax matters, it is important to apply the guidance carefully. If not, there could be no benefit at all!
The Charity Tax Group has been representing charities on tax for the last forty years. Its aims are to create a fairer tax system for charities and to better equip charities to deal with the tax system though newsletters, online training sessions and the resources available on its website – which has been called the taxopedia of charity tax! It is estimated that The Charity Tax Group has secured tax savings of over £10 billion for charities during its lifetime. Find out more at www.charitytaxgroup.org.uk or contact us at info@charitytaxgroup.org.uk.
*The views expressed are the author’s and not ICAEW’s.