How are charities taxed in your jurisdiction?
Broadly speaking, charities are taxable in the same way as other entities of the same type, for example, companies, trusts or unincorporated associations. However, organisations that are recognised as charities in the UK are subject to a number of exemptions and reliefs from tax on most types of income and on their capital gains, and on the profits of certain activities, provided that the money is used for charitable purposes only.
Donations made through the Gift Aid scheme by individuals who are UK taxpayers enable a charity to claim basic rate tax from Her Majesty’s Revenue and Customs (HMRC) on income received. Charities are also exempt from tax on donations received from companies, although no tax may be reclaimed as companies (unlike individuals) do not have tax deducted at source. Again, however, for any charitable tax exemption to apply, the money must be used for charitable purposes only.
There are also reliefs available for SDLT on the purchase of property by a charity and, in certain circumstances, from VAT on goods and services (eg, most cultural, medical and educational supplies).
Profits made by a charity from trading activities are likely to be taxable unless the activities are very closely aligned to the charitable purposes of the charity. For example, there are exemptions on profits from fundraising events and for activities carried out by the beneficiaries of the charity.
Many charities undertake taxable trading activities through a trading subsidiary that is taxable in the same way as any other company. If the subsidiary transfers some or all of its profits to the charity as a donation, the subsidiary is able to claim tax relief. Provided that the charity uses the income for charitable purposes, it will also be exempt from tax on that income.
Rental income from properties in the UK or overseas held by charities is exempt from UK tax, provided that the income is used for charitable purposes. However, profits made from developing property or land do not attract an exemption from UK tax.
Charitable companies are not liable for ATED in respect of any interest they hold in UK residential property that would otherwise be caught, provided that the interest in the property is held for qualifying charitable purposes.
Gifts made to charities are also exempt from IHT.
England & Wales Guide
The England & Wales guide answers the principal questions for Private Clients relating to the law in this jurisdiction.
