Charitable Giving – Making US-UK Dual Tax Qualifying Charitable Donations
As Autumn sets in, thoughts may sometimes turn towards year end planning strategies to help minimise tax. For US persons, donations to charitable organisations are often on the list of tax saving opportunities available. However, many charitable organisations are only considered to be qualified non-profit organisations in one jurisdiction or the other. As a result, giving directly to charities in either the US or the UK can be just a one-sided benefit.
Utilising a dual tax qualified gifting structure could allow individuals who have personal tax liabilities in the US and UK to benefit from charitable tax relief in both jurisdictions. Not only could the donation (and the donor) benefit from Gift Aid in the UK but the donor could also benefit from a tax deduction from their US tax liability as well.
Currently when donating to a US qualified charity (a 501(c)(3) organisation), an individual can receive a US income tax deduction if they itemise their deductions as opposed to claiming the standard deduction. US qualified Donor Advised Fund (DAF) holders can take a Federal income tax deduction of up to 50% of adjusted gross income for cash contributions and up to 30% of adjusted gross income for appreciated securities. So, for example, if a 39.6% taxpayer contributes the equivalent of £100,000 into a US qualified DAF, the donation would generally receive a tax deduction of up to £39,600.
Similarly, when donating to a UK charity, currently the donation will qualify for UK income tax relief. In addition, the donation should qualify for UK Gift Aid which would increase the value of the donation by 25%. So, for example, if a 45% rate individual taxpayer contributes £100,000 to a UK qualified DAF, the donation with Gift Aid will be £125,000 and the additional claim back from HMRC would be £31,250. Combining this with the US tax relief – a straight deduction of 39.6% on the original £100,000 gifted – means that the net cost to the donor of making a gift of £125,000 could be as little as £29,150 utilising a dual tax qualified giving vehicle. (Note: the actual tax treatment depends on the individual circumstances of the donor and may be subject to change in the future).
Since a dual qualified DAF allows individuals to receive tax benefits in both countries, this structure should ultimately allow the individual to allocate more money to their favoured charitable causes. Once the money has been donated to the dual qualified structure, the money can then be allocated to other charitable organisations and causes around the world without the need to be dual qualified.
Whilst charitable giving is not all about receiving a tax benefit for doing so, there are often limits to the amount that can be given and often donors would like to be able to give more if they had the ability to. Giving in a way that maximises the benefit to both the charity and the donor can mean that more ultimately reaches the cause. Utilising a dual qualified DAF is one way to help facilitate this strategy and should be considered when assessing charitable giving objectives.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy. You should remember that the value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.