Charitable donations to universities
The Prime Minister, Tony Blair, writing in the Daily Telegraph, tells us something we all already know: universities are cash-strapped, and they cannot be expected to rely on taxpayers' funds for everything. The tuition fees of £3,000 per student is nowhere near enough, so some other solution must be found to ensure that universities have enough money to carry out their essential work.
Blair would like more of us to donate money to our former universities, as is the practice in the United States. A good idea, and if we could be given worthy tax incentives, it just may catch on here.
At the moment, when we donate money to charity, we get relief under the 'gift aid' rules. The charity also gets something from the taxman. The way it works is you make a donation, and the taxman 'pretends' that your donation was 22 per cent bigger than it actually was. This is done by using the 'grossing up' formula. The basic rate is 22 per cent, so the 'grossing up formula' is 100/78 (because 100 - 78 = 22).
So if, for example, you donated £500 to your former university, the tax man would assume that you made a gift of £500 x 100/78 = £641. You send a cheque for the £500 to your old university, and the taxman sends a cheque for the balance (in this example, £641 - £500 = £141) to the university.
In order for the university to get its hands on the taxman's 'contribution', the donor must give a 'gift aid declaration' stating that for the tax year in which the donation is made, he has paid, or will pay, at least as much tax as the amount being claimed by the charity from the taxman (£141 in our example).
The donor also gets a measure of relief on his donation which results in a reduction of the tax he is to pay. For the 2006-07 tax year, the basic rate limit is £33,300. Income over this amount is charged to tax at 40 per cent. If, however, someone has donated money to a charity, the basic rate limit is increased by the amount of the 'grossed up gift'.
So in our example above, the basic rate limit of our donor will be, not £33,300, but £33,300 + 641 = £33,941. Tax at 40 per cent will be charged once this increased limit is exceeded.
You can also donate shares and securities to a charity, but here, the rules are different. There is no complicated 'grossing up' involved. Broadly speaking, the market value of the shares etc are deducted from your total income, giving you a lower income, and therefore, a lower tax liability. There are special rules in place for ensuring that the amount deducted does not exceed the value of the 'net benefit' to the charity. This is just to ensure that people do not manipulate the rules to deduct more than they should. The same rules apply if you donate freehold or leasehold land to a charity.
But are these measure of tax relief enough to get donors reaching into their purses? Most likely not, or they would have been doing so by now. If Blair really wants to see an increase in charitable giving, perhaps he should consider more attractive options. For example, instead of the gift aid system where the donor makes a net gift and gets an increase in his basic rate band, a straightforward deduction from taxable income would be a much better option. Also, the rules whereby relief is denied or withdrawn if one retains or regains an interest in gifted property could be relaxed.
There are many other options worth considering if the Government is serious about encouraging charitable donations to universities. As a non-tax point, many donors would like to see a surrender, or at least, a lessening, of Government control of universities before they commit their money.
Good idea by Tony Blair, but the Government must first do its part.
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