Gifting mutual funds to charity

My UK-US dual qualified tax accountant has told me he does not know the answer to this particular question. But perhaps some expert here knows and can take up the challenge of answering. It is in a good cause: gifts to charity.

I want to donate to charity by gifting US mutual funds with accumulated capital gains. As my accountant has explained it, the UK treats the sale of US mutual funds in peculiar ways. If the funds are "HMRC reporting" then the capital gain is subject only to capital gains tax at the rate of 28%.  But if they are "HMRC non-reporting" then the capital gain is subject to income tax at my marginal tax rate of 40% (or even 60% as I am losing my personal allowance). Maybe there is even some further tax on non-reporting funds. Does this distinction have any impact on the UK tax deduction I may take if I gift the fund to a dual-qualified UK-US registered charity? You can see what I am thinking: it might be that the most tax effective way for me to give to charity is to cleanse my savings portfolio of non-reporting US mutual funds.

What about the reverse situation? If I have UK mutual funds that I am learning are PFICS, can I gift them to charity and thereby reduce or completely eliminate the US tax liability?

One further wrinkle: can I do anything helpful by way of charitable giving if my UK mutual funds are contained within an ISA?

Does this distinction have any impact on the UK tax deduction I may take if I gift the fund to a dual-qualified UK-US registered charity?

Have you actually come across such a dual-registered charity? Most are registered in only one country. Figure out where you want to gift the funds before you spend too much time chasing this down.

Yes, indeed. I should not have used the term dual-registered, but it is possible to gain a tax deduction in both the UK and US simultaneously. CAF America (http://www.cafamerica.org/) can arrange for a donation to any UK registered charity (also with a gift aid enhancement if it is a gift from income) and for that to also be deductible against US tax. Perhaps the most convenient method is a Donor Advised Gift. See http://www.cafamerica.org/wp-content/uploads/DAG.pdf

Some UK charties also have a US arm which can take donations that qualify for tax deduction simultaneously in both countries. An example is Cambridge in America (http://www.cantab.org/).

Of course many of my UK donations, such as a museum ticket attracting gift aid, are not US deductible and that is just another example of double taxation in effect.

I would like to comment at this stage on one aspect of RW’s questions, namely obtaining a tax deduction for charitable contributions in the US and the UK.

My view is that a UK resident US citizen may only obtain tax relief in one jurisdiction.  In more detail:
•   Until 2010 the UK only allowed tax relief for contributions to UK based charities. The rules were changed in 2010 to allow relief to charities based in the EEA (the EU plus two Norway and Iceland). There was no extension to US charities. Further the UK US double tax treaty makes no provision of this nature.
•   My understanding is that in the same way the US only allows tax relief for contributions to US based charities.

I think that CAF America allows a US citizen to make a US tax deductible gift to a US charity, which charity later passes the benefit to a UK organisation. I do not believe that the later transfer allows a UK resident US citizen to claim a UK tax deduction.

I would be interested however if there are any examples of charities who make the specific claim that contributions are both deductible in the US and the UK for UK resident US citizens.

In answer to Dunedin, here is an example of a charity that makes tax relief possible in both countries simultaneously. They have organized things quite carefully, as explained below.

http://www.cantab.org/about-us/cam-uk

"If you are subject to tax in both the UK and US, you now have the opportunity to give to Cambridge in America (UK) Ltd, a registered charity in England, and be simultaneously eligible for tax benefits in both countries.

Although registered in the UK, the charity’s sole shareholder is Cambridge in America, a US charity. This structure enables those who are liable for both UK and US tax to obtain tax relief in both countries on the same contribution."

CAF America  has a similar structure.

https://www.cafonline.org/my-personal-giving/international-giving/dual-tax-payer-donations.aspx

"If you are an individual paying tax in the UK and US, you could find that the US tax rules invalidate UK tax breaks on charitable giving and vice-versa.

Through our CAF American Donor Fund* you can:
Claim Gift Aid in the UK, increasing the value of your donation by 25%
Claim UK tax relief (at 40% or 45% rates of tax) and get a tax deduction in the US.

*CAF American Donor Fund is the business name of Southampton Row Trust Ltd, a UK-based charitable company registered with the Charity Commission in England and Wales. The fund is wholly owned by CAFAmerica, a US 501 (c)(3) public charity."

Perhaps the answer to my question lies here, at least as regards the gift of a US mutual fund to Cambridge University.

http://www.cantab.org/about-us/cam-uk

"Which other gifts attract tax relief?

Capital assets standing at a gain can be given to the charity without being subject to US or UK tax on the gain."

I just need to discover whether or not an HMRC non-reporting US mutual fund counts as a capital asset.

In case anyone is interested, I now have a firm answer from a tax and trust solicitor, with supporting legal references.

A gift of a US mutual fund that is non-reporting to HMRC (and therefore in which gains are taxed as income) can be a tax deduction against both US and UK taxes when given to a dual-qualified charity such as Cambridge in America. The market value at the date of the gift can be a deduction against UK taxable income for the year in which you make the gift.  Therefore, if you give £10,000 of non-reporting funds the amount of your taxable income will be reduced by £10,000. The market value can also be a deduction for US tax on Schedule A.

A UK taxable person should not invest in non-reporting US funds. But if by accident you did this, then gifting may be a good way to handle things. If the fund has been growing for years, and 90% of its market value is now capital gains, then you may be just as well off by giving it away as you could be by selling it and receiving what is left after UK CGT.

I wonder if the symmetrical argument can be made for gifting UK mutual finds that are discovered to be PFICs?

I am writing in connection with RW further comments of 1 October

I am comfortable that a gift of a non-reporting fund gives rise to a UK income tax deduction under the Gift Aid type tax rules.  The rules make specific mention of offshore funds.

However, may I question another aspect?  Normally a gift of an asset would involve a disposal for capital gains tax purposes.  There is, however, a provision (TCGA 1997 s257) that disapplies this for a gift to a charity.  However, a disposal of a non-reporting fund would normally give rise not to a capital gain but to an income tax charged amount.  My question is therefore whether there is the equivalent of this section to prevent a charge to income tax when the non reporting fund is gifted to a charity. On a first look, I cannot find any provision of this nature. Could RW’s adviser give details of where this exemption is to be found?

Normally a gift of an asset would involve a disposal for capital gains tax purposes.  There is, however, a provision (TCGA 1997 s257) that disapplies this for a gift to a charity.  However, a disposal of a non-reporting fund would normally give rise not to a capital gain but to an income tax charged amount.  My question is therefore whether there is the equivalent of this section to prevent a charge to income tax when the non reporting fund is gifted to a charity. On a first look, I cannot find any provision of this nature. Could RW’s adviser give details of where this exemption is to be found?

The advice I have had is that the Overseas Income Gain on disposal of a non-reporting fund is calculated in accordance with the rule under the Taxation of Chargeable Gains Act 1992 as modified under the Offshore Funds (Tax) Regulations SI2009/3001, reg 39.  If the investment is gifted to a charity the gain/loss provisions of TCGA 1992, s 257 apply meaning that the gain is to be calculated as nil. Specifically, s257 says

(a)     the disposal and acquisition shall be treated for the purposes of this Act as being made for such consideration as to secure that neither a gain nor a loss accrues on the disposal.

The OIG having been calculated as nil means that the amount which is then chargeable to income tax is nil.

That logic makes sense to me.