There is a lot of debate at the moment about “US style” philanthropy and there is a widely held belief that that will only be possible if we have a “US style” incentive system tax. This page sets out what features the tax systems in the US and the UK share, and where the differences actually lie.
First, the two systems share a core philosophy: if you give money or an asset to a Charity (*) then you shouldn’t have to pay tax on it.
There are four main ways in which an individual can financially support a Charity in either the UK or US:
1. Direct cash support
2. Indirect cash support via payroll
3. Indirect cash support via an intermediary
4. Direct support through gift of an asset other than cash.
In almost all instances the donor gets some or all of the tax breaks available and, as the following will show, in most instances the tax treatment of that philanthropy is identical in both countries.
1. Gift of cash
If someone in the US gives cash they are able to use their tax return to deduct the value of the cash given from their income before their income tax is calculated.
Far fewer people in the UK fill in a tax return, using the PAYE system to handle their income tax. Possibly because of this, a different approach is taken in the UK. If the tax payer earns less than £37,400 and therefore only pays “lower rate” tax, the tax they have paid on the cash they have donated can be claimed back by the recipient Charity. If they are a higher rate tax payer, then they can claim back the difference between the lower rate tax claimed by the Charity and the higher rate tax they have paid.
In both countries the tax paid on a donation is claimed back. In the US it is the donor who makes the claim, in the UK it is the Charity and, in some instances, the donor as well.
2. Payroll giving
Payroll Giving is handled almost identically in both the US and the UK.
In both countries, the donation is made out of income before tax is calculated, effectively giving the donor in both countries an equal tax break.
3. Giving via an intermediary
In both the US and UK there are a range of intermediaries that can act as a tax efficient conduit for giving. They can range from private trusts created by the individual through to established bodies such as Community Foundations. However, in the US, this model of giving has become far more advanced. Most notably they have allowed for the creation of mechanisms such as Charitable Remainder Trusts which hold the donor’s capital and make regular annuity payments on that capital. Either the donor or the Charity can receive those payments, with the other part eventually receiving the capital.
In both countries the donor gets the tax break but in the US that tax break can be taken immediately on donations involving more complex financial arrangements.
4. Gift of assets
In both countries you can give assets to a Charity. There are two tax breaks associated with such a gift. First, you do not have to pay capital gains tax on the gift. Second, you can claim the value of the gift off your income before income tax is calculated.
In both countries, the donor gets the tax break on the gift of assets. Perhaps the key difference for the arts between the two countries is that in the US a donor can get the same tax breaks if they give a work of art. In the UK, although you will not pay capital gains tax on the gift of a work of art, you cannot claim its value against your income.
* Charity is a UK term referring to those organisations which have registered with the Charity Commission. No such body exists in the US – instead not-for-profit bodies need to gain a 501 (c ) (3) status from the IRS in order to take advantage of the tax breaks around philanthropy. For easy of reading, this article uses the phrase Charity to cover both the US and UK versions.