Gift Aid is a generous relief, particularly in the present tax climate. Its attraction to individuals is that the basic rate limit (£37,400) and the higher rate limit (£150,000) can be increased by qualifying Gift Aid donations (ITA 2007, ss 10(6), 414(2)). HMRC is seemingly aware of the generosity of the relief, and has previously sought to block schemes considered to exploit the relief (see HMRC Spotlight 9 (http://www.hmrc.gov.uk/avoidance/spotlights9.htm) dated 29 March 2010).
In addition, recent case law suggests that HMRC are very keen to ensure that Gift Aid donations by individuals satisfy the statutory conditions for the relief (ITA 2007, Pt 8, Ch 2). Two recent tax cases underline this point.
What is a ‘gift’?
In Winston Osborne v R&C  UKFTT 368 (TC) TC00650, the taxpayer appealed against a refusal by HMRC to accept Gift Aid claims in respect of an element of his subscriptions to a Masonic Lodge, which was paid through the Grand Lodge to the Masonic Grand Charity. The issue was whether the charitable element of the taxpayer’s subscription to the lodge was a gift made by an individual to a charity, within the Gift Aid rules. The appellant argued that the Masonic Lodge subscription and the charitable donation were separate elements of a single payment.
However, the tribunal dismissed the taxpayer’s appeal. It was noted that if the charitable element of the subscription had not been paid, the appellant’s subscription to the Lodge would fall into arrears and his Lodge membership would be terminated. The entire subscription (including charitable element) was compulsory. Thus there was no gift element as far as the charitable element was concerned, as the term ‘gift’ indicated a voluntary donation. There was no ‘qualifying donation’ for Gift Aid purposes.
Gift Aid and benefits
There is a rule in the Gift Aid provisions to prevent donations qualifying for relief if the donor (or a connected person) receives a benefit in consequence of making the donation, if the benefit exceeds certain limits (ITA 2007, ss 416(7), 418). This rule can sometimes cause unexpected problems for the taxpayer.�
In Harris (as trustee of the Harris Family Charitable Trust) v R&C  UKFTT 385 (TC) TC00667, the trustee of a charitable trust appealed against assessments to recover income tax repayments made in respect of Gift Aid donations. Mr Harris and his sister, Mrs Fine, had obtained higher rate tax relief on the grossed-up value of the gifts. Those gifts arose out of a deed of variation, in respect of their late mother’s will. The residue of the mother’s estate was left equally to Mr Harris and Mrs Fine. The deed of variation provided for legacies to the charitable trust. HMRC accepted the claim for IHT exemption on the charitable legacies. The payments were originally treated as donations made by Mr Harris and Mrs Fine under Gift Aid. HMRC subsequently enquired into the charity’s income tax repayment claim.
The tribunal had to decide whether the inheritance tax (IHT) exemption resulting from the deed of variation was a ‘benefit’ which prevented the gift from qualifying for Gift Aid. For IHT purposes, the result of the deed of variation was that the redirected gift to charity was exempt. This question arose in St Dunstan’s v Major  STC (SCD) 212, which involved the sole residuary legatee of an estate executing a deed of variation if favour of a charity within IHTA 1984, s 142. The Special Commissioner held that the redirected legacy to charity was not a qualifying donation for income tax purposes, and that benefits were not confined to gifts provided by the charity itself. A benefit had arisen from the IHT saving as a consequence of making the gift by means of a deed of variation.
The tribunal held that there was a benefit because an IHT liability had been removed by the deed of variation, that would have attached to property over which Mr Harris and Mrs Fine had a right of disposition. They each received the benefit of the IHT exemption in their capacity as residuary beneficiaries, in consequence of making the gift to the charity, which exceeded the Gift Aid limit for allowable benefits. The tribunal reached the same conclusion as in the Dunstan case. The appeal was dismissed.
Interestingly, the tribunal touched upon a potential tax planning point in relation to charitable donations. Reference was made to the income tax relief for gifts of qualifying investments to charity (under what is now ITA 2007, ss 431-446). ‘Qualifying investments’ in this context includes listed securities and interests in UK land.
The tribunal noted that, unlike the position for cash donations under Gift Aid, the restrictions on relief for qualifying donations where benefits are received by the donor only operates as a reduction of the amount on which income tax relief can be obtained, and not as a blanket disqualification (ITA 2007, s 434). Qualifying donations of assets may therefore be a practical alternative if the donor is likely to receive significant benefits from the charity.
The above article is reproduced from ‘Practice Update’ (November/December 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.