New legislation could discourage extremely large one-off gifts to charity

So the chancellor has said that he’ll cap the amount you can claim back in tax each year at a quarter of your gross income, or £50,000, whichever is higher.

How will this affect charities?

The first thing to say is that it only applies in a limited number of cases, but those will be the ones involving the biggest donations.Let’s say a guy earns just over £200,000. Come next April, he’ll theoretically pay just under £90,000 in income tax.

Anyway, he wants to give money to charity. He decides to give £100,000.

Under the tax rules that will exist from next April, the charity is entitled to claim Gift Aid on this: £25,000. He is entitled to claim a further £31,250 in higher rate relief.

So far, so good. Total tax relief £56,250. The charity receives a very generous £125,000.

Under the new rules, he loses more than £6,000 of that. And if he wanted to claim any other tax reliefs that year, he can forget it.

For a much larger donor, who’d sold his company for £20m and wanted to put all of that into a trust, and donate the tax, too, the situation is far worse. He and the charity could lose £4m or £5m. Or he might just decide not to bother.

So in short, this legislation has the effect of discouraging extremely large one-off gifts to charity. Not ideal.

The government’s said it wants to encourage more philanthropy, and it introduced the 10 per cent relief on inheritance tax especially to encourage very large gifts in wills. But with the chancellor’s new wheeze in place there’s now significantly less chance of that sort of large-scale philanthropy happening here while donors are alive.

So what now?

Well, an ideal solution – and the one the sector will lobby for – would be for relief on charitable donations to be excluded altogether from this scheme.

Failing that, excluding Gift Aid from tax relief calculations, and including only higher rate relief, wouldn’t discourage philanthropy too much.

It’s a sad fact that today we’re talking about “not discouraging philanthropy too much” being a victory.

But perhaps that’s not wholly unexpected, from a government that’s generally failed to put its money where its mouth is with regard to the voluntary sector.

See our round-up of stories on the 2012 Budget