Annex I - Charitable Tax Exemption

I.1 Introduction

I.1.1 A charity is exempt from tax on most forms of income and capital gains if they are applied to charitable purposes.

I.1.2 Once a body has been accepted as being a charity for tax purposes, it normally retains its charitable status until such time as it ceases to exist either in its original form or altogether.

I.2 Main Statutory Exemption

I.2.1 The main statutory exemptions from tax for the income of a charity are contained in Section 505 Income and Corporation Taxes Act 1988 (ICTA 1988). These exemptions relate to:-

  • income from land (paragraphs I.3.1 to I.3.3)
  • income assessable under Case III of Schedule D, such as bank interest, Gift Aid payments, any annual payments (paragraphs I.4.1 to I.4.4)
  • trading income (paragraphs I.5.1 to I.5.2)

I.3 Income from land

I.3.1 The profits of a property business carried on by a charitable company are chargeable to tax under S209 Corporation Tax Act 2009. S505(1)(a) ICTA 1988 provides an exemption from tax for the income of a property business provided the profits are applied to charitable purposes only.

I.3.2 The profits of a property business carried on by a charitable trust are chargeable to tax under Parts 2 and 3 ITTOIA 2005. S531 Income Tax Act 2007 provides an exemption from tax for the income of a property business provided the profits are applied to charitable purposes only.

I.3.3 The exemption applies to income from property businesses both in the UK and overseas.

I.3.4 The exemptions do not apply to profits from buying and selling land or profits arising from the development of land.

I.3.5 If a charity is buying and selling land or property this may be treated as non-primary purpose trading. The profits of such a trade will be chargeable to tax under s2 Corporation Tax Act 2009 or s5 ITTOIA 2005. The detailed guidance on trading is at BIM20051 - Trade: general: overview.

I.3.6 If a charity sells land that has been held as an asset any gain will normally be a capital gain. S256 TCGA 1992 provides an exemption for capital gains provided the gain is applied to charitable purposes only. However, if a contract for the sale of land includes a provision for the charity to share in future profits from the development of that land any such profits received will not be exempt; they will be chargeable under s776 ICTA 1988 or s755 ITA 2007. The detailed guidance on this is at BIM60300 - Land transactions: ICTA88/S776: Table of contents.

I.4 Income assessable under Case III of Schedule D

I.4.1 Section 505(1)(c)(ii) & (iia) ICTA 1988 provides for an exemption to charities in respect of

  • all income assessable under Case III,
  • any non-UK equivalent of Case III income which would otherwise fall to be assessed under Case VI or V.

I.4.2 The purchaser of a Treasury Bill or similar security may receive a discount, which is the difference between what he or she paid for the bill and what he or she receives for it on sale. This discount is normally assessable to tax under Case III Schedule D. In the hands of a charity it is exempt under Section 505(1) (c)(ii).

I.4.3 Any payment from one charity to another is treated as Case III Schedule D income in the hands of the recipient charity. But it is eligible for tax relief as if it were an annual payment.

I.4.4 Section 505(1)(c)(iib) provides for exemption from tax in respect of dividends and other distributions received by charities from companies not resident in the UK.

I.5 Trading income

I.5.1 A charity is exempt from tax on the profits of any trade carried on in the United Kingdom or elsewhere, which is either

  • exercised in the course of the actual carrying out of a primary purpose of the charity, or
  • is mainly carried out by beneficiaries of the charity
  • the turnover of a non-primary purpose trade falls below certain limits provided it is applied solely to charitable purposes.

I.5.2 The exemption from tax of a charity's trading income is considered in detail in Annex IV.

I.6 Capital Gains tax

I.6.1 Section 256 of the taxation of Chargeable Gains Act 1992 provides an exemption from tax on capital gains, provided the gains are applied for charitable purposes.

I.7 Foreign tax

I.7.1 Occasionally charities seeking to claim exemption from foreign tax from an overseas tax authority may request confirmation that they are subject to UK tax. Certain Double Taxation Agreements provide that a resident of the UK will be entitled to exemption or relief from the foreign tax on certain types of income only if he or she is subject to tax on that income in the United Kingdom.

I.7.2 Charities should be aware that a person is not regarded as subject to tax in the UK if the income in question is statutorily exempt from tax.

I.8 Extra Statutory Concessions

I.8.1 An extra-statutory concession is a relaxation which gives taxpayers a reduction in liability or exemption to which they are not entitled under the strict letter of the law.

I.8.2 Most concessions are made to deal with fairly minor or short lived anomalies under the legislation where a statutory remedy would be difficult to devise or would run to a length which was out of proportion to the importance of the matter.

I.8.3 Extra Statutory Concession C4 deals particularly with fund-raising events, full details of this concession can be found in Annex IV.