Individuals who have exposure to both US and UK taxes need to take greater care when planning any charitable giving to ensure that it is tax efficient.
A little attention can ensure that the available tax relief is maximised. Taxpayers considering making donations are recommended to speak to their regular Frank Hirth contact.
If looking to give tax efficiently the following points should, however, be borne in mind;
Obtaining maximum tax relief
- Choosing which jurisdiction will provide the highest level of effective tax relief (taking into consideration foreign tax credits) is a priority.
- Although confusing to US taxpayers the UK gift aid system does deliver tax relief at an individual’s marginal UK tax rate.
- It will generally be more efficient for a UK resident taxpayer (even if they have a residual US liability) to donate to a UK charity rather than a US charity due to the higher tax relief which can be claimed. For substantial donations this will also avoid any risk of an inheritance tax charge on the donation itself.
- Individuals with liability to both UK and US taxes will obtain the most effective relief by gifting to a dual qualified UK/US charity. This applies to not just US citizens but to anyone with tax liabilities in both locations and in-fact non-Americans (especially those taxed on the remittance basis) can often obtain the greatest benefit from doing this.
- UK residents should beware charitable entities called ‘US friends of….” or similar titles. Often these entities only provide US tax relief and although useful for taxpayers living in the US are often ill suited for individuals who are UK tax resident.
- If the desired charity does not have a dual qualified entity, then consideration could be giving to using a dual qualified Donor Advised Fund (e.g. The Charities Aid Foundation American Donor fund and The National Philanthropic Trust) or an intermediary charity (e.g. The Anglo American Charity Ltd). Both types of organisations will provide dual tax relief and, subject to a process of due diligence, pass the donation to the end charity of choice.
- Wealthy taxpayers could consider setting up their own dual-qualified charitable foundation but should be aware that the legal and administration costs can be prohibitive and often this is only worthwhile if very substantial donations will be made. Taxpayers also need to be aware that the US allows only 30% of income to be offset through a donation to a private foundation (compared to 50% for a public charity)
- In place of a private foundation many taxpayers will find that equal benefit can often be obtained through holding an account with a dual qualified Donor Advised fund.
Timing of gift
- A gift on or before on or shortly before 31 December would deliver both tax efficiency and cash flow benefits.
- The taxpayer can look to use carry back provisions to claim tax relief by reference to the previous UK tax year. To be effective the taxpayer will need to hold off filing the tax return for the relevant year until after the payment is made.
- Depending on income levels the taxpayer may wish to claim some UK tax relief by reference to current year and some by reference to prior year. Splitting payments may facilitate planning opportunities here.
Using Offshore Income and Gains
- 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 consideration should be given to using a donor advised fund.
Gifting assets rather than cash
- UK and US rules provide tax relief for the gift of certain non-cash assets, including listed securities.
- A taxpayer can claim income tax relief on donation of a qualifying asset. Where the asset has appreciated and been held for more than one year it is also possible to avoid having to recognise a taxable gain in both the UK and US (subject to the donation being to a dual qualified charity). The ability to both obtain income tax relief and avoid capital gains tax maximises the relief available
- Individuals deemed to be domiciled in the UK need to ensure that any charitable bequests are to EU charities which qualify for exemption from UK inheritance tax (IHT).
- For US domiciles US relief from estate tax would still be expected provided the EU charity is not overtly political.
- Substantial donations – meaning 10% or greater of the net estate - would also reduce the IHT tax rate on remaining taxable assets by 4%. The overall effective saving can therefore exceed 40%.
- Taxpayers could consider making their bequest to a dual qualified donor advised fund. This avoids any concerns as to whether the charity will qualify for US tax relief. Non-US domiciles can also obtain relief by the direct bequest of US based assets.
Gifts made after leaving the UK
- Individuals who have ceased UK residence, are still regarded as UK domiciled and wish to make substantial donations should still look to use dual qualified charities (including Donor Advised Funds) to ensure that there is no upfront IHT charge on the donation. The taxpayer can choose whether to elect for gift aid or not depending on their circumstances.