IHT: can I apply gift-aid to charitable gifts from capital ?

discountdude58938

I have pension income and already make a direct, regular (monthly, by standing order) transfer of surplus income to my kids. 

I do not give anything regularly to charity (no standing orders/direct debits), because I want to give one-off gifts to reduce my capital exposure to IHT instead of giving out of my income.

So, two questions:

1) How do I set things up so it is clear after my death that my gifts to charity (which I will review and execute annually) are from my capital, not income, and should therefore not reduce my 'surplus income'? Reducing my surplus income would expose my monthly direct gifts to my kids to IHT.

2) I pay income tax on my pension income. Can I apply gift-aid to my gifts to charity (up to the limit of my income tax) such that my income tax goes to charity? This is a 'nice-to-have' - I don't want to accidentally cause my charitable gifts to become considered as from my regular income, which would cause a problem for my regular transfers to my kids from surplus income.

TheGreenFrog

IMO gifts to charity during your lifetime will reduce your surplus income.   A gift to charity is simply not capital expenditure - in fact no gift is.

Jeremy535897

You have to look at income less living expenses. I don't think that gifts to charities are "living expenses," although I would probably tend to give one off sums to a different charity every year, and avoid deeds of covenant.
Whether you claim gift aid has no bearing on the matter at all.

DRS1

If you want to make it clear your charitable gift is from capital and not income make it bigger than your income.  Of course then you will not be able to gift aid it because you won't have the necessary level of income tax.

Keep_pedalling

It sounds to me like you are trying to shift charitable giving from the expenses column to capital, and these are not really one off gifts but annual gifts.

if you really want to reduce your IHT liability by making charitable gifts then actually make larger one off charitable gifts now rather than drip feed over the coming years. This would have the advantage of an immediate reduction of your IHT liability should you meet an early demise. 

Any such charitable gifts made within 7 years of your death do need to be declared on the IHT return so keep good records for your executors. 

The alternative solution is to give nothing now but make charitable bequests in your will. 

discountdude58938

Keep_pedalling said:

It sounds to me like you are trying to shift charitable giving from the expenses column to capital, and these are not really one off gifts but annual gifts.

if you really want to reduce your IHT liability by making charitable gifts then actually make larger one off charitable gifts now rather than drip feed over the coming years. This would have the advantage of an immediate reduction of your IHT liability should you meet an early demise. 

Any such charitable gifts made within 7 years of your death do need to be declared on the IHT return so keep good records for your executors. 

The alternative solution is to give nothing now but make charitable bequests in your will. 

Thanks.

If I do make a larger one-off charitable gift now, can that at least be gift-aided? Might as well let the charity benefit from one year's worth of income tax!

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

You have to look at income less living expenses. I don't think that gifts to charities are "living expenses," although I would probably tend to give one off sums to a different charity every year, and avoid deeds of covenant.

I don't see how "living" bit comes into the exemption.  Section 21 looks at "normal expenditure" and that looks at all normal expenditure, not just "living" expenditure.  For example, if I have a long-standing standing order for £100 per month to the RNLI then that this "normal expenditure". 

Making one-off payments to different charities each year might still mean that the payments are "normal expenditure" (or may not, depending on the facts).  So if each year before I do my tax return I make a gift to a charity (e.g. £3,000 to Parkinson's one year, £6,000 to Children In Need the next, etc) then that would probably be "normal expenditure". 

On the other hand if I pay £1,000 a year to Alzheimer's each year and then a £100,000 to Save the Children then that £100,000 is probably not normal expenditure.  I say "probably" because it again depends on the facts (e.g. if I had a settled intention of making sure my personal allowance was never tapered, and this year my income was particularly high, it might be normal expenditure).  

You are confusing the "normal expenditure" test for deciding whether a payment falls within the exemption with the "living expenses" test which is what you reduce your income by to see if you have enough spare income to cover gifts out of it.

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

[Deleted User] said:

Jeremy535897 said:

You have to look at income less living expenses. I don't think that gifts to charities are "living expenses," although I would probably tend to give one off sums to a different charity every year, and avoid deeds of covenant.

I don't see how "living" bit comes into the exemption.  Section 21 looks at "normal expenditure" and that looks at all normal expenditure, not just "living" expenditure.  For example, if I have a long-standing standing order for £100 per month to the RNLI then that this "normal expenditure". 

Making one-off payments to different charities each year might still mean that the payments are "normal expenditure" (or may not, depending on the facts).  So if each year before I do my tax return I make a gift to a charity (e.g. £3,000 to Parkinson's one year, £6,000 to Children In Need the next, etc) then that would probably be "normal expenditure". 

On the other hand if I pay £1,000 a year to Alzheimer's each year and then a £100,000 to Save the Children then that £100,000 is probably not normal expenditure.  I say "probably" because it again depends on the facts (e.g. if I had a settled intention of making sure my personal allowance was never tapered, and this year my income was particularly high, it might be normal expenditure).  

You are confusing the "normal expenditure" test for deciding whether a payment falls within the exemption with the "living expenses" test which is what you reduce your income by to see if you have enough spare income to cover gifts out of it.

Ah, I get it.  By "living expenses" you mean the expenses (hypothetical or otherwise) necessary to maintain someone's usual standard of living.

See https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14255