These articles and lecture transcripts relate to various dates in the past. The law may have changed and in any event no action should be taken in reliance on anything on this website without seeking further advice.
A charity must be recognised by HM Revenue & Customs for UK tax purposes (as well as being registered with the Charity Commission), and then qualifies for a number of tax exemptions and reliefs on income and gains, and on profits for some activities. This does not mean that charities never pay tax. A charity may receive taxable income or gains for which it will need to account on a tax return. A charity with business activities will be subject to the VAT rules but may qualify for certain VAT reliefs and exemptions.
A cardinal rule is that income and gains must be used for charitable purposes only. Subject to that, a charity may reclaim tax on income donated under the gift aid scheme and on income (e.g. bank interest) received under deduction of tax – but not dividend tax credits. Most investment income is tax-free, including rent and other income from land, but trading income is normally taxable. To avoid this many charities set up subsidiary trading companies and receive tax-free donations of the company’s profits, which are reduced by the amount donated. Gifts or land and shares by individuals may qualify for income tax relief on the value donated.
Capital gains made by charities are tax-free. A person giving an asset to a charity will also not pay capital gains tax, but the charity will inherit the base
cost to the donor of the asset and could be liable to tax on a later disposal if at that time it has ceased to be recognised as a charity for tax purposes.
Gifts and bequests to charities are not subject to inheritance tax.
Importantly, a charitable land trust will not have to pay stamp duty land tax on the purchase of freehold or leasehold land.
A charity charging for the supply of goods and services may be liable to register for and pay VAT, which it will in turn have charged the recipients of the supplies. VAT will usually be payable on supplies purchased by a charity, but there are a number of reliefs. One of the most valuable of these for a land trust is the zero-rating of construction of buildings for non-business charitable use and of certain works to listed buildings.
Charities enjoy a statutory relief of 80% of business rates, so no more than 20% of the normal rate is payable. Some local authorities extend this relief so that no rates at all are payable.