ALLISON PLAGER outlines the expansion of charitable giving brought in by the Finance Act 2002.
GIFTS OF MONEY and shares to charities have been the areas which have received the attention of the current Chancellor up to 2001. But, in his 2002 Budget, he introduced the idea of a new relief for charitable gifts of real property, and other measures related the carrying back of relief under gift aid, and to donations of medical supplies and equipment.
ALLISON PLAGER outlines the expansion of charitable giving brought in by the Finance Act 2002.
GIFTS OF MONEY and shares to charities have been the areas which have received the attention of the current Chancellor up to 2001. But, in his 2002 Budget, he introduced the idea of a new relief for charitable gifts of real property, and other measures related the carrying back of relief under gift aid, and to donations of medical supplies and equipment.
Gifts of property
The new relief for gifts to charity of land and buildings was enshrined in the legislation at section 97, Finance Act 2002 which amends section 587B and inserts section 587C into the Taxes Act 1988. It relates to gifts made by individuals from 6 April 2002, or by companies from 1 April 2002.
In essence, individuals and companies making gifts of real property to charity can claim a deduction from their income or corporation tax profits for the market value of the property, subject to the charity agreeing to accept the property, in the year when the gift was made.
Qualifying interest
A person or company may give a charity a gift of real property if he has a qualifying interest in the land. A qualifying interest means:
- a freehold interest in land; or
- a leasehold interest in land which is a term of years absolute.
The land being gifted must be in the United Kingdom, since the Government considered that it would be difficult to administer gifts of land held outside the United Kingdom (see the eleventh sitting of the Finance Bill 2002 Standing Committee debates, as reported in 'Drama Queen', Taxation, 18 July 2002, at pages 444 to 445).
The legislation states that an agreement to acquire a freehold interest or lease do not count as qualifying interests.
The gift is treated as a disposal, the value of which is reached using the market value of the land at the time of the disposal. If the gift brings with it any easement, servitude, right or privilege benefiting the land, relief is also given on that disposal.
More than one donor
Section 587C states that where more than one person owned or were beneficially entitled in common to the interest in land, relief could only be obtained if each person disposed of the whole of his interest in the land to the charity. Relief is given in proportion to the ownership of the land.
Proof
Relief is not available until the charity has given the donor a certificate verifying the gift. The certificate must:
- provide a description of the land gifted;
- state the date the gift was made; and
- contain a statement that the charity has acquired the qualifying interest in land.
Clawback
If a 'disqualifying event' takes place between the disposal of the land and the fifth anniversary of 31 January following the tax year of disposal or, for companies, the sixth anniversary of the end of the accounting period in which the gift was made, the tax relief is clawed back.
A disqualifying event happens if the donor, or a connected person (see section 839), becomes entitled to an interest in the land or obtains a right in relation to it other than for full consideration. However, if a connected person inherits an interest or right on the death of the donor, this does not constitute a disqualifying event.
Gift aid
The rules relating to donations made under gift aid were substantially overhauled in Finance Act 2000, (see my article 'It Is Better To Give ...' and Elizabeth Lathwood's article 'Charitable Giving - The New Rules', Taxation, 4 May 2000 at pages 116 to 117 and 118 to 119 respectively). However, the Chancellor made one change in the 2002 Budget to allow the donor to elect to treat the gift as if it were made in the previous year. Section 98, Finance Act 2002 permits the donor making a qualifying gift under section 25, Finance Act 1990 to elect to have the relief carried back to the previous year of assessment. The donor can do this by making a written election by the date on which the donor's tax return was submitted for the previous year, and no later than 31 January following the previous year of assessment. The Example demonstrates how this works.
An election should only be made if the donor has sufficient income or gains out of which the grossed-up gift could be made. The charity in receipt of the gift is not affected by the carry back of the individual's relief.
Example
In September 2003, Caroline makes a donation of £50 gross to a charity. The donation qualifies for gift aid. She elects to carry the gift aid relief carried back to 2002-03, and has paid sufficient tax to enable her to do so. She must therefore make a written election to carry back the relief in her tax return for 2002-03 or, if this has already been submitted, by 31 January 2004.
Medical supplies
Also enacted in Finance Act 2002 was the change in tax treatment of corporate donations of medical supplies and equipment for humanitarian purposes, announced by the Chancellor in the 2001 Budget.
The relevant legislation is in section 55, Finance Act 2002, and takes effect from 1 April 2002. It provides that when a company donates medical supplies, 'no amount shall be required to be brought into account as a trading receipt of the company in consequence of the making of the gift'. No additional relief is available, but companies may also deduct from their taxable profits the cost of transport, delivery and distribution of the donated goods.
This new legislation differs from the previous rule whereby a company which disposed of trading stock other than by way of arm's length transaction or a gift to a United Kingdom charity, was required to treat the full market value of the stock as a trading receipt in computing its corporation tax profits.
The legislation does not permit the donor company or a connected company to receive any kind of benefit from the gift. Thus, for instance, if a company donates medical supplies or equipment to encourage the recipient to purchase further supplies from a connected company not liable to United Kingdom corporation tax, the company would be liable to corporation tax on the equivalent amount made by the connected company on the profit made by the company of the subsequently purchased supplies. Likewise, if the company receives any benefit in respect of the costs related to the gift, the company will be liable to tax on those costs.
Overall, this new relief should make it easier and more attractive for United Kingdom companies to donate medicines and related equipment to countries in the developing world, although care will be required to ensure that any subsequent purchases by the recipients are not made as a result of the donation.
Tidying up process
The measures described above relating to charitable giving have broadened the scope of charitable donations, and eased the tax administration burden attached to such donations. Another proposal, possibly to take effect from April 2004, in connection with gift aid is to make it possible for the donor to allow the charity to receive all or some of the donor's tax relief as well as the tax it reclaims on the donation.
