Tax relief for donating free use of a property

Special rules

As you probably know, there are special rules which allow individuals tax relief for donations to registered charities. Companies are also allowed relief but a different set of rules apply and there are tougher anti-avoidance measures. In this article we’ll only be considering the rules for gifts made by companies.

What counts as a donation?

The director’s generosity seems to tick the boxes for charitable gift tax relief, but the trouble is there’s a fundamental problem - his company is not making a donation at all, it’s merely allowing free use of an asset meaning that no donation to the charity is made.

What the law says

The legislation says that qualifying charitable donations must fall into one of two categories:

1. Payments which are qualifying payments to charity in the form of “a sum of money”. Or
2. Transfers to a charity investment owned by the company. Investments that qualify are company shares, unit trusts etc., land and buildings.

It might seem that the arrangement with the charity falls into the second category, but it doesn’t. Simply allowing use of a property is not the “transfer” of it and so under the conditions in the legislation it is not a donation.

The company can create a lease over the property, for say five years, and gift it to the charity. This counts as a qualifying donation.

Advantages of a lease

Apart from creating an asset which the company can donate, a lease has non-tax advantages. For example, it defines the period of time, terms and conditions of the charity’s use to prevent misunderstandings and disputes regarding who is responsible for, say, buildings insurance, repairs etc. The creation of a lease quantifies the donation on which the company can claim tax relief. The tax rules say this is equal to the lease’s value to the charity, which would be the market value, i.e. the amount the charity would expect to pay for a similar lease bought on the open market.

In addition, the value of the lease (the amount on which the company can claim tax relief) is increased by any costs that the company incurs in creating it, e.g. solicitor’s, surveyor’s and accountant’s fees. The company must obtain a statement from the charity confirming the donation.

Ongoing costs

The director should also consider the most tax-efficient way to tackle the ongoing costs associated with the lease such as those mentioned above. The liability for these should be set out in the lease document. If the company intends to pick up the tab for some or all of the costs it should nevertheless make the charity liable under the lease for them but make a cash donation to it to meet the expenses wholly or partly.

If the company simply meets the costs to which the charity is liable it’s arguably not making a cash donation payment “to the charity” and so won’t be entitled to tax relief under the donation or general tax rules. This trap is avoided if instead it makes cash donations which the charity uses to meet expenses it’s liable to under the lease.