RECENT CHANGES TO UK tax legislation have transformed the rules surrounding charitable donations, particularly impacting those involving organisations outside the UK. Previously, individuals and companies making donations to certain non-UK charities could benefit from UK tax reliefs such as Gift Aid, capital gains tax relief, and inheritance tax exemptions. However, these changes now significantly restrict the scope of eligible organisations.

In today’s Shipleys Tax note, we look at the changes to UK tax relief rules for charitable donations and how they impact individuals and businesses. We’ll cover in general the updated rules, explore planning options, and provide practical strategies to ensure your charitable contributions remain impactful and compliant.

How UK Charity Tax Relief Used to Work for International Donations

Before the changes, charitable donations to organisations based in the European Union (EU) or European Economic Area (EEA) were treated similarly to those made to UK-based charities. This meant that:

1. Gift Aid: UK taxpayers could claim Gift Aid on donations to eligible EU/EEA charities, increasing the value of their contributions by 25%.
2. Capital Gains Tax Relief: Donations of assets, such as shares or property, to non-UK charities could qualify for relief under the “nil gain, nil loss” principle.
3. Inheritance Tax (IHT) Relief: Bequests to non-UK charities in wills were exempt from inheritance tax, ensuring that the full amount benefited the intended cause.

This favourable treatment recognised the interconnected nature of charitable work across borders, encouraging UK taxpayers to support causes globally while enjoying tax benefits.

Before the changes, charitable donations to organisations based in the EU/EEA were treated similarly to those made to UK-based charities..

New 2024 Rules: UK Charity Tax Relief Now Limited

From April 2024, tax reliefs are available only for donations to charities that meet the tightened definition of a “charity” under UK law. This includes:

1. Geographical Scope: The organisation must fall under the jurisdiction of the High Court in England and Wales, Northern Ireland, or the Court of Session in Scotland.
2. CASCs: Community Amateur Sports Clubs must operate within the UK and provide facilities for eligible sports exclusively in the UK.
3. EU/EEA Charities: While there was a transitional period for non-UK charities to adjust, this ended on 5 April 2024.

Donations to Non-EU/EEA Charities

Donations made by UK individuals or companies to charities outside the EU/EEA, such as those in Pakistan, Bangladesh, or the Middle East, generally do not qualify for UK tax reliefs. Under UK law:

1. No Gift Aid or Tax Relief: Direct donations to charities in these regions are not eligible for Gift Aid, capital gains tax relief, or inheritance tax exemptions.

2. The Alternative: To benefit from UK tax reliefs, donations must be channelled through a UK-registered charity or donor-advised fund (DAF). These entities can distribute funds to overseas causes while ensuring compliance with UK tax rules.

Case Study:
James, a UK taxpayer, wishes to donate £15,000 to a health initiative in Bangladesh. If he donates directly to the Bangladeshi charity, he receives no tax relief. However, by donating to a UK-registered DAF, which then supports the same initiative, James can claim Gift Aid, increasing his donation’s value to £18,750, and receive income tax relief on the amount contributed.

This approach ensures his support remains impactful while benefiting from UK tax efficiencies.

How Can Donors Plan for the New Rules?

1. Review Existing Donations:
   • Check whether the organisations you support still qualify for tax reliefs.
   • If not, explore UK-based alternatives or partner organisations that achieve similar objectives.

2. Utilise Donor-Advised Funds (DAFs):
   • A DAF is a flexible giving vehicle that allows donors to make a contribution, claim tax relief immediately, and distribute funds to eligible charities over time.
   • Example: Emma sets up a DAF with £50,000. She claims tax relief on the contribution and later supports approved UK charities in education and healthcare.

Donations made by UK individuals or companies to charities outside the EU/EEA, such as those in Pakistan, Bangladesh, or the Middle East, generally do not qualify for UK tax reliefs

3. Establish a UK-Based Charity or Trust:
   • For individuals supporting overseas causes, setting up a UK-based charity that funds projects abroad can ensure compliance with UK rules while retaining tax benefits.
   • Example: Sarah establishes a UK charitable trust to support educational initiatives in India, maintaining tax efficiency for her donations.

4. Diversify Donation Methods:
   • Beyond cash donations, consider giving assets like shares, property, or other valuable items. This may also help reduce other tax liabilities.
   • Example: Tom donates a portfolio of shares worth £30,000 to a UK charity, avoiding capital gains tax and receiving income tax relief.

The Bigger Picture

The changes reflect the UK government’s focus on aligning tax reliefs with domestic charitable activities. While they may limit support for international causes, proper planning ensures that donors can still achieve their philanthropic goals.

With the new restrictions on which charities qualify for tax relief, including limitations on donations to EU/EEA and global organisations, it’s more important than ever to understand how to maximise your charity giving while staying tax-efficient. So if you regularly donate to non-UK organisations, it is essential to reassess your contributions, understand the impact of the new rules, and seek professional advice to optimise your giving strategy. This will help ensure your donations remain impactful and tax-efficient under the updated rules.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284                  Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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THE UK CHANCELLOR, Rachel Reeves, today delivered Labour’s first Budget since 2010 after coming to power over the summer. A mixed bag with no real innovation to restart the UK economy. With much of the announcements being leaked beforehand, there were no surprises other than the significant change to NIC for employers.

Here at Shipleys Tax we provide a summary of the UK Autumn Budget 2024 with some brief insights on personal and business tax measures:

At a glance summary

1. National Insurance for Employers
The employer National Insurance rate will increase from 13.8% to 15% in April 2025, paired with a decrease in the NI threshold from £9,100 to £5,000. This change significantly raises costs for businesses, especially those with larger workforces or lower-wage employees, as NI contributions start sooner in the earnings scale. To offset some impact, the employment allowance is raised to £10,500, allowing about 865,000 small businesses to reduce or eliminate their NI contributions​.

2. Personal Tax Adjustments

• Income Tax Threshold Freeze:

The government extended the freeze on income tax thresholds until 2028, drawing more earners into higher tax bands due to “fiscal drag.” This measure indirectly increases tax revenue without changing rates.

• Inheritance Tax:

Several IHT changes have been introduced:

• New AIM Share IHT Rate: AIM-listed shares, previously fully exempt, now only receive 50% relief, leading to a 20% effective IHT rate.

• Adjusted Relief on Business and Agricultural Assets: For estates above £1 million in business/agricultural assets, a 50% IHT relief will apply, aimed at ensuring smaller family-owned estates remain protected.

• Threshold Freeze Extended: The IHT threshold freeze, initially set to end in 2028, now extends to 2030, likely drawing more estates into the tax bracket as asset values rise​.

• Pension Pots Subject to IHT: From 2027, inherited pension pots will be taxed, impacting estate planning where pensions were intended for tax-free inheritance.

3. Corporation Tax Steady
Corporation tax remains at 25%, offering stability for SMEs. While no further rate increases were announced, potential policy shifts around capital allowances could incentivize reinvestment in business growth.

4. Capital Gains Tax Increase
Capital Gains Tax is set to increase from 10% to 18% for lower rate taxpayers and from 20% to 24% for higher rate taxpayers, with no changes to the Annual Exempt Amount (AEA) of £3,000. The government’s decision to avoid a drastic hike aligns with investor concerns, especially for business asset disposals, which retain a £1 million lifetime relief. The Capital Gains Tax increase announced in the Budget reduces the gap between Capital Gains Tax and Income Tax rates, although it perhaps remains significant enough to encourage entrepreneurs to invest in their businesses.

Business Asset Disposal Relief changes – The rate of Capital Gains Tax available under Business Asset Disposal Relief remains at 10% this financial year, rising to 14% in April 2025 and 18% in 2026. The lifetime limit of £1m remains unchanged.

Currently, Business Asset Disposal Relief reduces CGT to 10% on all qualifying gains, a major tax incentive that benefits company directors providing the conditions are met. While BADR continues to provide access to reduced rates of Capital Gains Tax, the CGT rate is set to increase from 6 April 2025.

5. VAT and Digital Compliance
SMEs in the e-commerce sector face tighter VAT compliance as the government rolls out new VAT collection mechanisms, aimed at narrowing the tax gap on digital sales. This step aligns with the broader effort to improve tax efficiency in digital transactions.

6. R&D Tax Credits Expansion
R&D tax credits are extended, particularly benefiting SMEs in tech and green sectors. Eligible SMEs can claim up to 20% of R&D expenses, supporting innovation-focused businesses.

7. Apprenticeship and Training Grants
New grants now cover 50% of training costs for SMEs investing in apprenticeships, addressing skill shortages across key sectors​

More to follow.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284                  Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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THE UK HAS some of the most complex and voluminous tax legislation in the world, making it all too easy for taxpayers to miss out on valuable reliefs simply because they assume they will be applied automatically. Imagine losing thousands—if not millions—of pounds in tax relief, not because you didn’t qualify, but because you didn’t know how to claim it correctly. Taxpayers often assume that tax reliefs, especially valuable ones, will automatically apply to their financial situation.

In today’s Shipleys Tax brief we look at how misunderstanding tax laws can lead to missed opportunities and financial setbacks and how failing to actively manage and claim tax reliefs can result in costly mistakes using some basic case studies.

(NB: All rates and allowances are as at date of the article.)

The Importance of Actively Claiming Tax Relief

Tax reliefs (such as Business Property Relief (BPR), Capital Gains Tax (CGT) relief, Income Tax reliefs, and Inheritance Tax (IHT) reliefs) can significantly reduce a taxpayer’s liability. However, they are not automatically applied, and taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.

Case Study 1: Tribunal Denies Business Property Relief (BPR) Claim

Business Property Relief basics

In the right circumstances Business Property Relief (BPR) allows for the reduction or complete elimination of Inheritance Tax (IHT) on the value of business assets when they are passed on as part of an estate. This relief typically applies to businesses that are trading and do not have the hallmarks of investment trade, the aim being to help protect businesses from being dismantled to pay inheritance taxes.

…taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.

Background

A family-owned restaurant that has been actively trading for over a number of years would generally qualify for full BPR, meaning that if the owner passes away, the restaurant’s value would not be subject to IHT when transferred to the owner’s heirs. This ensures that the business can continue without needing to be sold to cover tax liabilities.

The Pitfall: Mrs T’s Fishery Business

In a recent case, Mrs T who had operated a fishery business for 17 years, saw her Business Property Relief (BPR) claim denied by the First-tier Tribunal. The fishery, initially run by her late husband, was once a profitable business involving the stocking of fish. However, after regulatory changes, the business shifted to maintaining a wild fishery with minimal services offered to customers. The tribunal concluded that the business had transitioned into one primarily holding land for investment purposes rather than operating a trading business, disqualifying it from BPR.

Key Takeaway: Regularly review your business model. A shift in business activities or external factors can result in your business being viewed differently for tax relief purposes. In Mrs Pearce’s case, the absence of services like tuition or equipment hire meant the business was classified as an investment, not an active trade.

Case Study 2: Denial of Entrepreneurs’ Relief (ER) on Property Sale (CGT)

Entrepreneurs’ Relief basics

Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) allows individuals to pay a reduced rate of Capital Gains Tax (CGT) of 10% when selling a qualifying business or shares in a trading company, up to a lifetime limit of £1 million. This relief is designed to incentivise business owners and entrepreneurs by lowering the tax burden on the sale of their business.

Background

If a small business owner sells their trading company for £500,000, under Entrepreneurs’ Relief, they would only pay a 10% CGT rate on the sale, rather than the standard rates of 20%. This could result in a significant tax saving of £50,000.

The Pitfall: Denial of Entrepreneurs’ Relief on Property Sale

In another case, a property developer sought to claim Entrepreneurs’ Relief on the sale of a commercial building. The developer believed that the building, held within his trading company, qualified for the relief under Capital Gains Tax (CGT) rules. However, upon review, it was determined that the building had been rented out for several years, and the income from this rental activity was considered non-trading. As a result, the company was no longer classified as a trading company for CGT purposes, and Entrepreneurs’ Relief was denied.

Key Takeaway: Ensure that qualifying conditions are maintained with regular monitoring, usually a good accountant will see to this on an annual review. Entrepreneurs’ Relief is only available if a company is trading. In this case, the shift to generating rental income changed the company’s classification, leading to loss of relief and a significant tax liability.

Ensure that qualifying conditions are maintained with regular monitoring, usually a goods accountant will see to this on an annual review.

Case Study 3: IHT Agricultural Property Relief (APR) Disallowed

Agricultural Property Relief basics

Agricultural Property Relief (APR) allows for up to 100% relief from Inheritance Tax (IHT) on agricultural property, such as farmland, farm buildings, and growing crops, when it is passed on as part of an estate. The goal is to preserve the value of agricultural businesses by reducing or eliminating the IHT burden, ensuring that the business can continue without disruption.

Background

A farmer who owns £1 million worth of farmland can pass that land on to their children with no Inheritance Tax liability, as long as the land qualifies for APR. This can save the heirs up to £400,000 in IHT.

The Pitfall: Agricultural Property Relief Disallowed

A recent IHT case involved a claim for Agricultural Property Relief (APR) on farmland that had been used for grazing cattle. The owner believed the land qualified for relief as agricultural property. However, the tribunal ruled that since the land had not been actively farmed for several years and was primarily used for renting out grazing rights, it did not meet the strict criteria for APR. Consequently, the estate was subject to inheritance tax on the full value of the land.

Key Takeaway: Again as above active farming and monitoring through compliance reviews is critical for APR qualification. Landowners must demonstrate ongoing agricultural use to qualify for this relief. A shift to passive income from land rental, even if it involves agricultural activities, can disqualify an estate from APR.

Conclusion: The Importance of Regular Tax Review

Taxpayers should not assume that valuable tax reliefs will automatically apply or continue to apply without a thorough review of their financial and business activities. Whether it’s Business Property Relief, Capital Gains Tax relief, or Inheritance Tax relief, the rules are intricate, and failing to meet the conditions can lead to substantial tax liabilities. To maximise tax savings, it’s crucial to stay informed, maintain the correct business structure, and consult with tax professionals to ensure ongoing eligibility.

By staying proactive, taxpayers can avoid the costly mistake of missing out on significant tax reliefs.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284 Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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