You can ignore this page if either of the following applies:
Otherwise, read on!
When you know something well, it is easy, but wrong, to assume that everyone else knows it.
As a tax specialist, I have known about the relief for giving shares to charity since it was first legislated. I used for the first time in November 2000 when I gave some shares to the Manchester Grammar School Bursary Appeal and have used it subsequently for further gifts to that Appeal and for gifts to Clare College Cambridge.
The attraction is very simple. Giving shares to charity avoids eventually suffering capital gains tax when you sell the shares.
If you would pay tax on selling the shares, (A) below always gives a better answer than (B).
I explained this to a group of Clare College alumni as part of “My talk on charitable giving, inheritance tax, and SIPPs”. However I have written the current page to explain the point by itself, uncluttered with other tax issues, and to cover some practical aspects.
As with every page on my website, the disclaimer in my footer applies. I am not giving advice and do not accept any legal responsibility for anyone taking action after reading my website. You need to either review your situation for yourself or seek professional advice.
It helps to look at the tax rules in stages.
We need to consider what rate of income tax people pay.
If you are not a taxpayer, the tax implications are very simple.
In the later calculations, I compute something which I call the “Benefit ratio.” That is the amount of benefit the charity receives divided by the cost to you, the donor, net of any tax relief you may receive.
Here the benefit ratio is very simple. £1 divided by £1 = 1.0
You will see that in the above example, the donor does not give a Gift Aid certificate to the charity. The reason is that when you are not a taxpayer, if you provide a gift aid certificate, HM Revenue and Customs will charge you tax equal to the Gift Aid refund received by the charity.
If you had given the charity a Gift Aid certificate, it would receive a 25p refund but you would get a tax bill for 25p. Incidentally, the benefit ratio would still be 1.0, being £1.25 / £1.25.
The figures become slightly more complicated when you are an income taxpayer. There are three different rates of income tax, 20% (paid by most people), 40% and 45%.
I have done the calculations for each case and recommend downloading the file “Charity scenario 1 – cash gift.pdf”.
The calculations show what happens when you give £8,000 being someone who pays tax at 20%, 40% or 45%, computing both the net cost to you after tax relief, and the amount received by the charity.
Obviously, the higher your tax rate, the greater the tax relief to you. That is the mirror image of the fact that if you earned an extra £100, the higher your tax rate the more tax you would pay.
The benefit ratio ranges from 1.25 for someone who pays tax at 20% up to 1.82 for someone who pays tax at 45%.
The calculations become more complicated if you own shares where there is an inherent capital gain; in other words, the market value of the shares is greater than your base cost.
Each person has an annual capital gains tax exemption; the figure for the tax year 2021-2022 is £12,300. However, I assume that you are already using this exemption for other gains, so I ignore it in the calculations.
The amount of inherent capital gain will vary depending upon how much you paid for the shares and how much they are worth now. Obviously, the smaller the capital gain, the less capital gains tax you will pay.
To illustrate the figures, I have done some calculations in the file “Charity scenario 2 – sell shares, give net of CGT cash.pdf”.
I assume that you have some shares worth £10,000 which cost you £2,000. For each income tax rate, I compute what happens when you sell the shares, pay the capital gains tax rising, and give the cash left over to charity.
The benefit ratios are lower in each case, being 1.06, 1.11 and 1.17.
They are lower because the CGT paid is “Dead money.” It is money that is lost to you but does not reach the charity, being paid to HM Revenue and Customs.
In this scenario, I assume that you own the same shares as in Scenario 2. They are worth £10,000 and cost you £2,000.
In this scenario you give the shares, as shares, to charity. Once the charity owns the shares, it will almost certainly sell them to get cash. However that is up to the charity to decide.
Giving shares to charity as two important tax consequences:
Accordingly, people who pay income tax at 20%, 40% or 45% save income tax of £2,000, £4,000, or £4,500. The calculations are set out in the file “Charity scenario 3 give shares.pdf”
The benefit ratios are 1.25, 1.67, and 1.82.
These are the identical benefit ratios to Scenario 1 where you give cash.
The key point is that there is no “Dead money”, since you are not paying any capital gains tax.
Having done the calculations, there is still a residual question.
Assuming you have a reasonable amount of cash available (so you don't need to sell any shares to make the gift,) what should you do?
|Keep the shares and give cash?||Benefit ratios 1.25, 1.67, and 1.82 depending on tax rate.|
|Keep the cash and give shares?||Benefit ratios 1.25, 1.67, and 1.82 depending on tax rate.|
The reason you should give shares is very simple. All of us pay our living costs (food, utilities etc.) in cash. You cannot spend shares! Accordingly, for substantial gifts, I believe that it is always better for your personal cash flow planning to give shares.
Obviously, if you are giving a small amount of money, it is simply not worth the hassle of giving shares.
These benefits are real even if you have more than enough cash for the next few years of spending. If you give £10,000 worth of shares to charity (instead of giving cash), you will have £10,000 worth of cash retained which otherwise you would have given to the charity instead.
If you invest that £10,000 (which you did not give to the charity) to buy some shares, those shares will have a base cost of £10,000. The shares you gave away had a base cost of only £2,000.
Accordingly, when you eventually do sell these new shares, even in the far future, your capital gain will be £8,000 less than if you had kept the shares and given cash to charity.
In passing, if you do this, you need to be careful which shares you by, or when you buy them.
Buying back the identical shares within 30 days will not uplift your base cost due to some complicated anti-avoidance rules introduced to counter “bed and breakfast sales.” These rules are explained on the HMRC page page “CG51560 - Share identification rules for capital gains tax from 6.4.2008: the “same day” and “bed and breakfast” identification rules.”
The effect would be to treat you for CGT purposes as having given to charity the shares you bought afterwards within 30 days, and as having kept your original low base cost shareholding.
That depends upon the charity. Both Manchester Grammar School and Clare College Cambridge have sizeable investment portfolios, so they already have a firm of stockbrokers who can handle the transaction very easily.
In both cases, I simply completed some paperwork and the charity’s stockbrokers liaised directly with mine to transfer the shares concerned to charity. Once the transfer was completed, I received a letter from the charity telling me the market value of the shares transferred. I put that figure onto my tax return to receive the income tax relief due on the gift.
However, many charities do not have a stockbroker. Fortunately, there is a charity called ShareGift whose purpose is to facilitate giving shares to charity.
I first came across ShareGift about 20 years ago when they were mentioned in the magazine “Investors Chronicle” which I subscribe to. Investors are often left with small shareholdings which are inconvenient, and not particularly practical to sell.
For example, either I or my wife had a shareholding where we had elected for scrip dividends. Each time the company paid a dividend, instead of receiving a cash dividend, we received a few more shares whose value was equivalent to the dividend.
When we sold the shareholding, a few months later we received a scrip dividend. The reason was that there is often a reasonable delay between the date you become entitled to the scrip dividend and the date you receive it.
Having some shares worth about £20 (from memory) was a complete nuisance. Each year, we woulld have received a few pennies of annual dividends. If we had sold the £20 worth of shares, about half of the sale proceeds would have disappeared in stockbroking charges.
Instead, we gave away the shares to ShareGift. We had the satisfaction of knowing that a random charity would benefit by £20. We also received tax relief on the £20, and there were no associated costs. In that case, although the £20 value went to charity, we had no control over which charity it went to.
However, I recently discovered that for larger gifts (defined by ShareGift as being over £500), ShareGift allows you to nominate the charity that will receive the cash after ShareGift has sold the shares that you have given to ShareGift.
For completeness, you receive similar income tax relief and exemption from capital gains tax if you give land and buildings to charity. As I have no such assets to give away, I have never taken any interest in this relief.
However, some wealthy individuals will have multiple investment properties. Giving such a property to charity rather than selling the property to give cash has similar arithmetic consequences.
This page is based on an article that I wrote for "The Private Investor" which is the house magazine of the United Kingdom Shareholder's Association (UKSA). Past issues are available to the world, but the current issue is only available to UKSA members.