Guidance

Annex i: tax exemptions for Charities

Updated 25 October 2017

1. Introduction

1.1 Charities may claim exemption from tax on most forms of income and capital gains, if they’re applied to charitable purposes.

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.

2. Main statutory exemption

2.1 The main statutory exemptions from tax for the income of a charity are contained for:

• charitable companies - in sections 466 to 493 Corporation Tax Act 2010 (CTA 2010)
• charitable trusts - in sections 521 to 536 Income Tax Act 2007 (ITA 2007)

These exemptions relate to all charitable tax exemptions and are subject to the condition that income is applied to charitable purposes.

3. Income from land

3.1 The profits of a property business carried on by a charitable company are chargeable to tax under section 209 Corporation Tax Act 2009 (CTA 2009). Section 485 CTA 2010 provides an exemption from tax for the income of a property business.

3.2 The profits of a property business carried on by a charitable trust are chargeable to tax under Parts 2 and 3 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Section 531 ITA 2007 provides an exemption from tax for the income of a property business.

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

3.4 The exemptions don’t apply to profits from buying and selling land or profits arising from the development of land.

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 section 2 CTA 2009 or section 5 ITTOIA 2005.

The detailed guidance on trading is at BIM20051 - Trade: general: overview.

3.6 If a charity sells land that has been held as an asset any gain will normally be a capital gain. Section 256 Taxation of Chargeable Gains Act 1992 (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 won’t be exempt; they will be chargeable under Part 18 CTA 2010 (section 815 et seq) or section 755 ITA 2007. The detailed guidance on this is at BIM60300 - Land transactions.

4. Interest and other annual payments

4.1 Sections 475/476, 486 and 488 CTA 2010 and sections 532 and 534 ITA 2007 provide for an exemption to charitable companies and charitable trusts respectively in respect of:

• all interest, Gift Aid donations and other annual payments
• any non-UK equivalent of such income which would otherwise fall to be assessed as foreign income

4.2 Any payment from one charity to another charity is taxable income in the hands of the recipient charity - section 523 ITA 2007 (trusts) and section 474 CTA 2010 (companies) refer. But it’s exempt from tax if it’s applied for charitable purposes only.

4.3 Section 488 CTA 20101988 and Section 536 ITA 2007 provide for exemption from tax in respect of dividends and other distributions received by charitable companies and charitable trusts respectively from companies not resident in the UK.

5. Trading income

5.1 A charity’s exempt from tax on the profits of any trade carried on in the UK or elsewhere provided its income is applied solely to charitable purposes and which is either:

• exercised in the course of the actual carrying out of a primary purpose of the charity (section 478 CTA 2010 for charitable companies and section 524 ITA 2007 for charitable trusts)
• mainly carried out by beneficiaries of the charity (section 478 CTA 2010 and section 524 ITA 2007)
• a non-primary purpose trade the turnover of which falls below certain limits (section 480 CTA 2010 and section 526 ITA 2007)
• the profits arise from certain lotteries

5.2 The exemption from tax of a charity’s trading income is considered in detail in Annex iv.

6. Capital Gains Tax

6.1 Section 256 TCGA 1992 provides an exemption from tax on capital gains, provided the gains are applied for charitable purposes.

7. Foreign tax

7.1 Occasionally charities seeking to claim exemption from foreign tax from an overseas tax authority may request confirmation that they’re 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 they’re subject to tax on that income in the UK.

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

8. Fund raising events

8.1 Exemption from tax on the profits from fund-raising events is provided as follows:

• Section 483 CTA 2010 for charitable companies
• Section 529 ITA 2007 for charitable trusts