I am always delighted to see clients donate to good causes but often feel frustrated when potential tax relief is foregone. I see five common mistakes;
#MISTAKE 1: LOSING OUT ON TAX RELIEF
Choosing which jurisdiction will provide the highest level of effective tax relief (taking into consideration foreign tax credits) is a priority for maximising tax efficiency when giving, but often does not receive the required attention.
I regularly see US citizens, resident in the UK, give directly to a charity based in the US, even though it would normally be more efficient for such clients to choose a UK-qualifying charity given the higher UK tax rates.
In fact, the optimum tax relief can be obtained by donating to a charitable entity which is qualified in both the US and the UK.
One of the most popular ways to do this is through a donor-advised fund (DAF), which is qualified in both jurisdictions. Subject to a process of due diligence, these charities, which are often similar to charitable savings accounts, agree to direct any donations to another charity of choice.
An individual looking to ultimately benefit a US charity could do so through one of these entities, benefitting their chosen cause while still picking up maximum relief. These organisations do charge a fee but it is usually much lower than clients expect.
The Charities Aid Foundation American Donor fund and The National Philanthropic Trust are two such organisations clients regularly use.
Another way to obtain dual tax relief is to donate to a charity that has its own dual qualified entity, but care needs to be taken. US citizen benefactors in the UK are often directed to sister charities called ‘US Friends of…" or to entities with similar nomenclature, but these sometimes do not provide dual tax relief as might be expected.
The final way to ensure dual tax relief is to set up one’s own dual-qualified charitable foundation but the legal and administration costs can be prohibitive.
#MISTAKE 2: NOT MAKING USE OF OFFSHORE BANK ACCOUNTS
Current and former remittance basis taxpayers can potentially use foreign income and gains to obtain both UK and US tax relief without creating a taxable remittance. This requires that the donation be paid directly to the offshore bank account of the charity concerned.
If the charity is small and does not have an offshore bank account using a DAF can help.
#MISTAKE 3: GIFTING CASH NOT ASSETS
It is common for donations to be made in cash, but UK and US rules provide tax relief for the gift of other assets, including listed securities.
Where qualifying assets have appreciated substantially (and have been held for more than one year) it may be better for the client to gift the asset rather than cash.
An individual can claim income tax relief on the value of the gift but avoid having to recognise a taxable gain in both the UK and US (subject to the donation being to a dual qualified charity).
#MISTAKE 4: BAD TIMING
Where dual relief is claimed it is generally beneficial from a tax and cash flow perspective to make any donation on or shortly before 31 December. The client can claim US tax relief in the calendar year of payment but potentially utilise carry back provisions to claim UK tax relief in the earlier UK tax year (subject to the relevant UK tax return not being filed). Splitting payments may also facilitate planning opportunities here.
#MISTAKE 5: NOT UPDATING WILLS
Where an individual becomes UK domiciled it is important to ensure that their wills are updated so that any charitable bequests are to EU charities which qualify for exemption from UK inheritance tax (IHT).
Substantial donations – meaning 10% or greater of the net estate - would also reduce the IHT tax rate on remaining taxable assets by 4%.
Despite the potential benefits, I often see wills which still leave assets to a favoured US charity (thus not qualifying for IHT relief) and potentially costing clients 40% (or more!) of the amount bequeathed.
In such cases if the intent is to benefit a non-EU charity then again one could consider using a DAF.
The above tax-planning oversights are surprisingly common, even among supposedly sophisticated and well-advised clients, but are easily corrected and should not detract from the ultimate intent of the donor.
Mixing philanthropy with tax planning is never a bad thing as obtaining the maximum possible tax benefit ensures that even more funds are potentially available to go to charity!