Guidance

Annex viii: tainted charity donations

Updated 27 March 2024

1. Introduction

1.1 This guidance applies where taxpayer donors enter into arrangements to obtain financial advantage from a charity or a Community Amateur Sports Club (CASC). Only such donors, charities and CASCs need to consider whether the new rule applies to their donations.

The tainted charity donations rules do not apply to a:

• simple donation to charity where no additional arrangements are entered into
• donation under Gift Aid that is within the Gift Aid benefit limits
• donation, any benefit of which has been taken into account in calculating the relief due for donations to charity of shares, securities and real property, or trading stock

1.2 Schedule 3 to the Finance Act (FA) 2011 introduced new anti-avoidance rules (the Tainted Charity Donations rules) to prevent the abuse of the tax reliefs available to donors to charities and CASC.

1.3 The Tainted Charity Donations rules ensure that the usual tax reliefs are not available where donors enter into arrangements to obtain a financial advantage from a charity or CASC for themselves, or someone else involved in the arrangement, in return for their donation. Some, but not all, of the previous rules in respect of substantial donors to charity transactions, (see below for substantial donor guidance) (at sections 549 to 557 of the Income Tax Act 2007 (ITA) and sections 502 to 510 of the Corporation Tax Act 2010 (CTA)) up to, and including, 31 March 2013 are disapplied. After that date the legislation on substantial donors to charity has been largely repealed.

1.4 Parts 1 to 3 of Schedule 3 to Finance Act 2011 (FA 2011) introduced the Tainted Charity Donations rules. Part 1 covers Income Tax (Chapter 8 Part 13 ITA 2007) while the same provisions are broadly replicated for Corporation Tax (Part 21C CTA 2010), in Part 2 and Capital Gains Tax (section 257A TCGA 1992) in Part 3. The legislation is structured in the following way:

• a list of the tax reliefs to which the new rule applies
• the new rule (and the 3 conditions that are to be satisfied for a donation to become ‘tainted’)
• circumstances in which a financial advantage is deemed to arise or to be ignored
• removal of reliefs and imposition of a tax charge
• supplementary definitions that support the new rule

Schedule 3 to FA 2011 also contains both:

• consequential amendments (Part 4 of Schedule 3 FA 2011)
• commencement and transitional provisions (Part 5 of Schedule 3 FA 2011)

1.5 This guidance explains the application of the Tainted Charity Donations rules, highlighting where any differences in treatment are to be found between the effect for Income Tax, Corporation Tax and Capital Gains Tax.

For the purposes of this guidance references to ‘charity’ apply also to CASC.

2. Outline of the Tainted Charity Donations rules

2.1 The Tainted Charity Donations rules are based on a purpose test which considers the effects of, and circumstances in which the donor or someone connected to the donor, entered into arrangements to make the donation, and to whether those arrangements are deemed to obtain a financial advantage.

2.2 Three conditions, A, B and C must be met for a donation to be a tainted charity donation.

Where all 3 conditions are satisfied, the donor loses any tax relief that they would have been entitled to claim, had the donation not been tainted.

An additional charge to tax may also arise where the donation would have been eligible for relief under the Gift Aid Scheme (for individual donors only). See section 13 below ‘Tainted charity donations and Gift Aid’, for who’s liable to such a charge.

The 3 conditions which must be met for a donation to be tainted are:

• Condition A — the donation to the charity and arrangements entered into by the donor are connected.

• Condition B — the main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity.

• Condition C — the donation is not made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made.

All 3 conditions must be met for the new rule to apply.

The conditions are explained in more detail at paragraphs 1.4 onwards.

Commencement and application of the rules

2.3 These rules only apply to donations that are defined as ‘relievable charity donations’. Donations that are not defined as relievable charity donations are not affected by these rules. See sections 809ZI (1) and (2) of Chapter 8 of Part 13 ITA 2007.

The tainted charity donations rules apply from 1 April 2011. They largely replace the previous substantial donors to charity rules which have been repealed in respect of transactions taking place on or after 1 April 2013, subject to a specific exclusion.

2.4 A transitional provision changes the substantial donors to charity rules in relation to certain transactions on or after 1 April 2011. Where a pre-existing substantial donor enters into a transaction caught by the substantial donors to charity rules, but that transaction is not ‘tainted’, then the charity will not lose its exemption from tax.

2.5 Financial advantages that are permissible under the Gift Aid benefit rules limits in respect of donations of money made under the Gift Aid Scheme are outside the scope of the tainted charity donations rules. Similarly, where any benefit has been taken into account in calculating the relief due for donations to charity of shares, securities and real property, or trading stock, the tainted charity donations rules do not need to be considered.

3. Relievable charity donations

3.1 Section 809ZI ITA 2007 and section 939B CTA 2010 define a relievable charity donation as a gift or other disposal which is both:

• made by a person to a charity
• eligible for tax relief

3.2 A gift or other disposal is eligible for tax relief if one or both of the following apply:

• (ignoring the tainted charity donations rules) tax relief would be available in respect of it under the relevant relieving provision
• the charity is entitled to claim a repayment of tax in respect of it

3.3 The relevant relieving provisions are listed at section 809ZI(4) ITA 2007 and 939B(4) CTA 2010. These are the UK tax reliefs available to donors to charity:

• section 257 TCGA 1992 (gifts of chargeable assets)
• section 63(2)(a), (aa) and (ab) CAA 2001 (gifts of plant and machinery)
• part 12 ITEPA 2003 (Payroll Giving)
• section 108 ITTOIA 2005 (Gifts of Trading Stock)
• chapters 2 and 3 of Part 8 ITA 2007 (Gift Aid and Gift of Shares, Securities and Real Property)
• section 105 CTA 2009 (Gifts of Trading Stock)
• Part 6 CTA 2010 (charitable donations relief)

3.4 Where, under the terms of a settlement, a charity is entitled to receive income arising under that settlement, the tainted charity donations rules apply as if that income were an amount gifted to the charity by the trustees of the settlement.

4. Tainted charity donations

4.1 As explained at paragraph 2.2 above, a relievable charity donation only becomes a tainted donation where all of conditions, A, B and C are satisfied.

5. Condition A

5.1 ‘Condition A’ looks at whether it’s reasonable to assume that there’s any inter-dependency between a donation and an ‘arrangement’ entered into by a ‘linked person’. If a donation is made and there are no arrangements in place, or any arrangements that are entered into are not dependent upon, or connected to, the donation being made, ‘Condition A’ will not be satisfied. The donation will not be a tainted charity donation. If, however, a linked person does enter into an arrangement, and it’s reasonable to assume that the donation and the terms of the arrangement are dependent upon each other, then ‘Condition A’ will be satisfied.

5.2 For the purposes of this test, references to a linked person include a ‘donor’ or a person connected to the donor at the relevant time. ‘Relevant time’ means a time during the period which begins with the earliest, and ends with the latest, when the:

• arrangements (referred to in ‘Condition A’) are entered into
• relievable charity donation is made
• arrangements are first materially implemented (this could be some time before or after the arrangements are agreed between the parties)

5.3 The legislation requires a judgement to be made as to whether it’s reasonable to assume that a donation and arrangements would or would not have been made independently of each other. The judgement must take into account the likely effects of the donation and the arrangements and the circumstances surrounding the donation and the arrangements entered into. For example, a charitable health provider may offer donors a priority treatment service if their donations exceed £100. A donor who gives more than £100 with a view to making use of this priority treatment service would be caught by ‘Condition A’ as the donor would have made a donation as part of an arrangement to make use of the charity’s priority treatment service.

6. What’s an arrangement?

6.1 The action of a donor making a simple donation to charity is not in itself entering into an arrangement. The term ‘arrangement’ is not exhaustively defined in the legislation (section 809ZR(1) ITA 2007 and section 939(I)(1) CTA 2010), but includes any scheme, arrangement or understanding of any kind and may involve one or more transactions.

6.2 An arrangement does not need to be legally enforceable - it could be an informal understanding between 2 parties that something will be done or some action will (or will not) be taken. For example, an individual may be sold some Government securities at substantial undervalue on the understanding that within a specified period they will either return them or sell them and make a payment to a charity out of the proceeds. That would be an arrangement for these purposes.

Example 1

A donor gives £100,000 to a hospital (a charity) in recognition of the excellent treatment received by his son during his stay. The hospital subsequently writes to thank the donor for the unexpected donation.

6.3 In this example the donation will not be caught by the tainted charity donations rules. There was no arrangement in place for the hospital to provide any services in connection with the donation, so ‘Condition A’ does not apply. Even if his son (or any other person connected to the donor) were to receive further ongoing treatment at the hospital, a lack of an arrangement means that the donation will not be caught.

6.4 The making of a donation is not in itself an arrangement and this legislation clearly refers to both concepts separately. In this example, there’s a donation, but there are no arrangements and the hospital may spend the donation as it sees fit. It’s not under any obligation to provide the donor (or any member of his family) with specific medical treatment.

6.5 Example 2

The position set out in example 1 would be different if the donor had agreed with the hospital that in return for a Gift Aid donation of £100,000 the hospital would provide treatment that would ordinarily cost £125,000. In this instance, there is clearly an arrangement in place. Further, the circumstances and likely effects are such that it is reasonable to assume that the donation would not have been made, and the arrangements would not have been entered into, independently of each other. There is a connection between the donation and the terms of the arrangement. Consequently, ‘Condition A’ would be satisfied.

6.6 It is worth noting that, in this modified example, the first principles of the Gift Aid rules would apply. The payment of £100,000 was clearly not a gift, having been made to secure treatment at a reduced rate, and therefore no tax relief would be available. There would not be any need to consider the tainted charity donations rules in this instance. However, if the donor entered into more circuitous arrangements in order to distance the Gift Aid donation from the benefit of medical treatment, the Gift Aid rules may not operate to deny relief. The tainted charity donations rules would then have to be considered.

6.7 ‘Condition A’ would apply because the donor would have entered into an arrangement (now more complicated and contrived than the original scenario) in connection with their donation. If conditions B and C were also satisfied, the donation would be tainted and the tax relief denied.

6.8 If ‘Condition A’ is not satisfied (that is, there’s no interdependence between the donation and arrangements entered into) the donation is not a tainted charity donation. Conditions B and C can be ignored.

7. Condition B

7.1 ‘Condition B’ is concerned with the linked person’s purpose in entering into an arrangement that is within ‘Condition A’. If the main purpose or one of the main purposes of the arrangement is for the linked person to receive a financial advantage directly or indirectly from the charity then the donation will meet ‘Condition B’.

8. What is a financial advantage?

8.1 The term ‘financial advantage’ is not specifically defined in the legislation. The legislation deems a financial advantage to be obtained in certain circumstances, but the term is not limited to those circumstances. A financial advantage is deemed to have been obtained where a linked person enters into a transaction with another party, as part of the arrangement caught by ‘Condition A’, and either the:

• terms of the transaction are more beneficial to the linked person than might reasonably be expected in a transaction concluded between parties dealing at arm’s length
• terms of the transaction are less beneficial to the other party than might reasonably be expected in a transaction concluded between parties dealing at arm’s length
• transaction is not of a kind which the other party, dealing at arm’s length, might reasonably be expected to make

The other party would normally be a charity or another person through which financial advantage is provided.

8.2 For example, if a donor makes a donation of £10,000 to a charity on the understanding that the charity will provide the donor with a loan of £12,500 on terms that see no security given and the loan is interest free, the donor will have obtained a financial advantage from the charity. The terms of the transaction (the making of a loan) are more beneficial to the donor than could have been obtained had the transaction been at arm’s length. The donor has received a loan of £12,500 without having to pay interest or provide security should they default on repayment.

8.3 Example 3

Mr A is a trustee of 2 charities, charity B and charity C. Charity B is responsible for running a college and charity C provides financial support for the college. Mr A also controls company D which runs a leisure facility (swimming pool, gym, squash) which is used by the students of the college during school hours and fee-paying members of the public outside school hours. Company D wants to expand the leisure facility to allow opening to the public in the day and to provide more up-market facilities. In other words, this is a wholly commercial development. To fund this, company D offers interest-free loan stock. Mr A makes a Gift Aid donation of £100,000 to charity B. Company D issues interest free loan stock of £125,000. Charity B subscribes for £125,000 of the loan stock and requests it be issued in the name of charity C.

8.4 In this example the donation is a tainted charity donation. There’s an arrangement in place that, in connection with the donation, the charity will provide an interest free loan (by buying loan stock) to a company connected with the donor and the donation would not have been made and the arrangements would not have been entered into independently of one another. Therefore, ‘Condition A’ of the new legislation will be satisfied.

8.5 A main purpose of entering into the arrangement is for the donor to obtain a financial advantage, in this instance, an interest-free loan for his company, enhanced by the Gift Aid repayment claimed by Charity B, and therefore ‘Condition B’ is satisfied. The donor is not a charity-owned company or relevant housing authority so ‘Condition C’ is satisfied and the donation is therefore a tainted charity donation.

9. When a financial advantage is to be ignored

9.1 There are some circumstances in which a financial advantage is to be ignored for the purposes of ‘Condition B’ (section 809ZL ITA 2007 and section 939E CTA 2010). Broadly, these circumstances are where the:

• person receiving the financial advantage applies the advantage for charitable purposes only
• financial advantage is in respect of a Gift Aid donation, and the value of the advantage falls within the Gift Aid benefit rules
• financial advantage has been taken into account in determining the ‘relievable amount’ for tax relief claimed as part of a gift of shares, securities and real property to charity
• financial advantage has been taken into account in determining the amount of tax relief claimed in respect of a gift of trading stock to charity

9.2 Example 4

A US citizen lives and works in the UK (receiving UK-source income subject to UK tax) and decides they want to make a relievable charity donation of £10,000 to a charitable organisation in the US. The donor is linked to the US organisation. The donor arranges to make their donation to a UK agency charity recognised by HMRC and, on making the donation, applies Gift Aid so the agency receives £12,500 (£10,000 donation plus a £2,500 Gift Aid repayment) to distribute on the donor’s behalf. The donor requests the agency charity to pass the funds to the US organisation that undertakes charitable activities, and the US organisation spends the charitable funds on activities recognised as charitable under the law of England and Wales.

9.3 In this example the donation will not be caught by the tainted charity donations rules. The donor enters into arrangements with the agency charity to ensure that her donation, once made, will be routed on to the US charitable organisation. The donation would not have been made to the agency charity in the absence of this arrangement so ‘Condition A’ is clearly satisfied.

9.4 The main purpose for entering into the arrangement’s to increase the funds of the US charitable organisation (a financial advantage) and this organisation is linked to the donor.

9.5 ITA 2007 and section 939E CTA 2010 provide for certain financial advantages to be ignored. One such advantage is where the body that receives the financial advantage (in this case the US charitable organisation) applies the financial advantage for charitable purposes only. The effect of section 809ZL ITA 2007 and section 939E CTA 2010 mean that ‘Condition B’ cannot be met in this case, and therefore the donation is not tainted.

10. What’s a transaction?

10.1 The term ‘transaction’ is not defined in the legislation but a number of examples are set out at section 809ZK(5) ITA 2007 and section 939D (5) CTA 2010:

• the sale or letting of property
• the provision of services
• the exchange of property
• the provision of a loan or any other form of financial assistance
• investment in a business

10.2 If a donor’s purpose or main purpose of entering into an arrangement was not to obtain a financial advantage (directly or indirectly), from the charity for themselves (or a connected party), then ‘Condition B’ will not have been satisfied and the donation will not be a tainted charity donation.

11. Condition C

11.1 ‘Condition C’ ensures that a donation will not be a tainted donation if the donor is a ‘qualifying charity-owned company’ or a ‘relevant housing provider’ linked with the charity to which the donation is made.

11.2 A ‘qualifying charity-owned company’ means a company that is wholly owned by 1 or more charities, 1 of which is the charity to which the donation was made, or a connected charity. This condition is restricted. It does not apply where a person who stands to obtain a financial advantage from the arrangement was, within the previous four years in control of the charity owned company at the relevant time. This restriction’s designed to prevent a donor or connected person from taking themselves outside the scope of ‘Condition C’ by transferring to a charity a trade or business that the donor or connected person carried on.

11.3 A ‘relevant housing provider’ is a non-profit registered provider of social housing or a body entered on a register maintained under specified Housing Acts. A relevant housing provider is linked to a charity where 1 is wholly owned, or subject to control by the other, or both the relevant housing provider and charity are wholly owned (or subject to control) by the same person.

12. What happens where a donation is tainted?

12.1 Where a donation is tainted (tainted donation), the donor is not entitled to claim tax relief that would otherwise have been due in respect of it, or in respect of any other donation that’s associated with it.

12.2 An associated donation is a donation made in accordance with an arrangement that meets conditions A and B. However donations are not associated donations if they’re made by a company that’s either:

• wholly owned by 1 or more charities, at least 1 of which is the charity to which the associated donation in question was made
• a relevant housing provider linked with the charity to which the associated donation in question was made.

13. Tainted charity donations and Gift Aid

13.1 If the donation would have been a qualifying donation under the Gift Aid scheme if it were not a tainted donation, the charity will continue to be entitled to make a repayment claim to HMRC in respect of Income Tax. However an Income Tax charge will arise in connection with this repayment. The amount of the Income Tax charge is equal to the amount of the repayment of tax that the charity would be entitled to claim in respect of the gift aid donation (whether or not the charity makes the repayment claim).

The tax charge may fall on the donor, a connected person or any other potentially advantaged person under the relevant arrangements in relation to the tainted donation, or the charity (or any connected charity). In practice HMRC will look to the donor and any other financially advantaged person first. In any event, HMRC would not seek to charge the charity unless the charity was party to, and aware of, the arrangements to obtain financial advantage.

13.2 There will be no liability to Income Tax where the repayment is repaid to HMRC under some other provision, for example if the charity is charged to tax on non-charitable expenditure in relation to the donation.

14. Meaning of a charity being ‘party to’ and ‘aware of’ the tainted charity donation arrangements

14.1 A charity is jointly liable to pay the Income Tax charge (referred to in paragraph 13.1) where the charity was both:

• party to a relevant arrangement that caused the donation to become tainted
• aware that a linked person was party to an arrangement providing financial advantage as described in ‘Condition B’

In order for a charity to be caught by this provision it must also have been aware, at the time it entered into those arrangements, that the arrangements were for the donor or a person connected with the donor to obtain a financial advantage, directly, or indirectly from the charity. A charity would be ‘aware’ of the arrangements where the managers or persons in a position of authority or control of the charity had knowledge of the arrangements. Merely receiving a tainted donation would not on its own mean that a charity was ‘party to’ or ‘aware of’ such an arrangement.

15. Donations from trusts

15.1 Charging provisions, similar to those that apply in relation to tainted charity donations made by individuals under Gift Aid, apply in respect of certain donations to charity by a trust.

15.2 The provisions apply when the tainted donation’s a payment by trustees out of trust income to a charity which is entitled to claim repayment of Income Tax in respect of that payment. The amount of the tax charge is equal to the amount the charity is entitled to reclaim.

15.3 The people on whom the tax charge may fall include the:

• trustees of the settlement who made the trust donation
• settlor of a settlor-interested trust and any beneficiary of the settlement (whether or not the settlement is settlor-interested) who is party to the arrangements
• charity, where there is evidence that the charity was party to, and aware of the arrangements that caused the donation to become tainted (see paragraph 14.1 for circumstances where a charity would be caught by this provision)

15.4 Example 5

Mr A settles a rental property worth £20 million on a non-charitable trust (the B Trust).

The trustees have discretion to apply the income arising for the benefit of the employees of D Industries Ltd as they consider to be appropriate. D Industries Ltd is controlled by Mr A and his immediate family.

A discretionary payment of £1 million is made out of the rental income by the B Trust to the trustees of the C Charitable Trust, whose trustees include Mr A. The C Charitable Trust has broad charitable objects, which it exercises in the towns in which D Industries Ltd is based.

The payment by the trustees of the B Trust to the C Charitable Trust is treated as if it were made after deduction of income tax at the trust rate of 50%. The trustees of the C Charitable Trust are treated as receiving a gross payment of £2 million on which £1 million tax has been suffered.

They claim exemption from income tax under section 536 ITA 2007 and claim a repayment of £1 million. The trustees of the C Charitable Trust are immediately approached by the directors of D Industries Ltd requesting a loan.

The trustees agree to make an unsecured loan to D Industries Ltd of £1.9 million at a favourable rate of interest and repayable on demand.

15.5 The discretionary payment of £1 million to the C Charitable Trust is a ‘relievable charity donation’. The donation is ‘tainted’ because a linked person, Mr A, has entered into arrangements (the discretionary payment and the subsequent advantageous loan) the purpose of which is to obtain a financial advantage from the charity (such as an advantageous loan of the gross amount of the discretionary payment). Consequently, an income tax charge of £1 million can be charged on the trustees of the B Trust, or any of the other persons identified in section 809ZO ITA 2007, which may include the trustees of the C Charitable Trust.

15.6 Example 6

Mr E settles a rental property worth £40 million on a non-charitable trust, the F Trust. One of the beneficiaries is the G Charitable Trust of which Mr E is a trustee. The G Charitable Trust is entitled, under the terms of the settlement, to 50% of the rental income arising to the F Trust.

During the tax year 2014 to 15 the G Charitable Trust is entitled to rental income of £1 million. After paying basic rate tax the trustees of the F Trust pay £800,000 to the charity. The charity claims exemption from Income Tax and claims repayment of the tax credit £200,000.

Shortly afterwards H Ltd, a company controlled by Mr E, enters into an agreement with the charity to provide services to the charity on terms that are unduly favourable to H Ltd.

15.7 The payment of income to which the G Charitable Trust is entitled, under the terms of the settlement of the F Trust, is a ‘relievable charity donation’. The donation is ‘tainted’ because a linked person, Mr E, has entered into arrangements, the main purpose of which is to obtain a financial advantage from the charity (such as, the unduly favourable contract). So Income Tax of £200,000 can be charged on the trustees of the F Trust to recover the tax repaid, or any of the other persons identified in section 809ZO ITA 2007, which may include the trustees of the G Charitable Trust.

16. Interaction with the substantial donors to charity rules

16.1 The substantial donors to charity rules remained largely in place following introduction of the tainted charity donations rules. However, no new ‘substantial donors’ can arise on or after 1 April 2011.

The substantial donors rules were not repealed in full from 1 April 2011. This is because transactions carried out on or after 1 April 2011, where the donation was made before 1 April 2011, would otherwise be free from a tax charge as the tainted charity donations rules apply only to donations made on or after that date.

17. Interaction with the Gift Aid benefit limits

17.1 The new rules contain provisions that ignore a financial advantage if it’s a benefit associated with a gift that is a ‘qualifying donation’ for Gift Aid. If a benefit associated with a gift is within the limits specified in the Gift Aid benefit rules the donation may be a ‘qualifying donation’.

17.2 Example 7

An art conservation charity offers donors who make donations of £5,000 or more a special membership package called Gold membership. This entitles members to a benefits package including free admission to permanent exhibitions, private viewings, the right to attend an annual ‘Curator’s Reception’, which includes refreshments, an opportunity to meet other major supporters and hear a prominent expert delivering a talk about current art conservation issues, plus 12 monthly newsletters. The charity has agreed with HMRC that the value of the benefits package is £250.

17.3 The receipt of a benefits package as a result of making a donation is an arrangement caught by ‘Condition A’ of the new legislation; the circumstances are such as to suggest the donation would not have been made without the benefits package.

17.4 It’s likely that ‘Condition B’ would apply as the donor’s main purpose in making the donation in the amount given is likely to be to obtain the benefits package. The donor is caught by ‘Condition C’.

17.4 However, these packages are designed to incentivise the donor to make a larger donation and ensure that the benefits provided fall within the Gift Aid benefit limits. In this case, the free admission to permanent exhibitions can be disregarded under normal Gift Aid rules. The newsletters are regarded as having negligible value. Private viewings and the right to attend the reception is within the Gift Aid benefit limits. Consequently, the value of the benefits package is ignored as a financial advantage for the purposes of the tainted charity donations rules.

18. Connected charities

18.1 For the purposes of the tainted charity donations rules, a charity is connected with another charity where they’re connected in a matter relating to the structure, administration or control of either charity. This is to ensure arrangements that seek to separate the making of a donation and obtaining a financial advantage by involving a number of connected charities in the arrangements are caught by the new rule.

19. Connected persons

19.1 The tainted charity donations rules apply to persons connected to the donor as well as to the donor. So, if arrangements that would not have been entered into independently of a donation are entered into for the purpose of obtaining a financial advantage for a person connected to the donor the rules still apply.

19.2 For the purposes of the tainted charity donations rule the normal Taxes Acts definition of connected person (section 993 ITA 2007 and section 1122 CTA 2010) is extended as follows:

• a beneficiary of a settlement is connected with the trustees and settlor of the settlement
• a man and woman living together as husband and wife are treated for this purpose as if they were husband and wife
• 2 people of the same sex living together as if they were civil partners are treated as if they were civil partners
• the term ‘close company’ is taken to include companies that would be close companies if they were resident in the UK

20. Transitional provisions — relaxing the substantial donors to charity rules

20.1 A transitional provision relaxes the substantial donors to charity rules in relation to certain transactions on or after 1 April 2011. Where a pre-existing substantial donor enters into a transaction caught by the substantial donors to charity rules, but that transaction’s not ‘tainted’, then no charge to tax will arise.

20.2 A substantial donor transaction is ‘tainted’ if it’s made as part of an arrangement that would not have occurred independently of the associated donation. The effect of the provision is to ensure that transactions that would not have formed part of an arrangement under the tainted charity donations rules will not attract a tax charge under the substantial donors to charity rules. Charities will therefore need to monitor only those transactions with existing substantial donors where the donations and arrangements were not independent of each other up to 31 March 2013, rather than the 5 years under the substantial donors to charity rules.

21. Repeal of the substantial donors to charity rules

21.1 The substantial donors to charity rules are repealed in respect of transactions taking place on or after 1 April 2013, subject to a specific exclusion for ‘excluded transactions’. The substantial donors to charity legislation will continue to apply after 1 April 2013 if a substantial donor entered into a contract before 1 April 2013 and a transaction under that contract is entered into on or after 1 April 2013 (an ‘excluded transaction’). The effect of this is to ensure that ongoing payments made under a contract that is caught by the substantial donors to charity rules continue to be caught. However, if the terms of the contract are varied on or after 1 April 2013 the substantial donors to charity legislation will no longer apply and the situation will fall to be considered under the tainted charity donations rules. Therefore, operation of the substantial donor’s rules after 1 April 2013 should apply only to a very small minority of substantial donors.

21.2 Example A

Mrs A donated £30,000 to charity B on 1 May 2010, which means that Mrs A is a substantial donor of charity B. Under the substantial donors to charity rules the charity would have needed to monitor any transactions it enters into with Mrs A for 5 years after the tax year 2010 to 2011 (up to 5 April 2016). A person connected with Mrs A enters into a transaction with charity B in June 2012. For example, Mrs A’s son is employed by charity B after an open recruitment process and receives remuneration at a rate that is commensurate with the work he is carrying out.

21.3 This transaction would be caught under the substantial donors to charity rules. As a result the remuneration paid to Mrs A’s son would be treated as non-charitable expenditure and charity B would lose exemption from tax on an equivalent amount of income.

The employment will be an ‘excluded transaction’. This is because the contract was made before 1 April 2013 and so the substantial donors to charity rules still need to be considered in respect of remuneration paid after 1 April 2013. However, if the terms of that contract are varied on or after 1 April 2013 (for example, to reflect a change in the range of duties) the transaction would no longer be ‘excluded’ and future payments would no longer be caught under the substantial donors to charity rules.

21.4 By itself, the excluded transaction rule would leave the substantial donors to charity rules in place until 31 March 2013. However there is a transitional provision, referred at paragraph 1.14 above that softens the effect of the substantial donors to charity rules. This applies where a transaction is not ‘tainted’, that’s the donation and the transaction are independent of one another. In the example above it’s clear that there’s no link between the donation and the transaction. Charity B had a vacancy that it needed to fill, the donation did not lead to Mrs A’s son being given the job and the remuneration received reflects the value of the job being carried out. Therefore, the transaction is not ‘tainted’ and the substantial donors to charity rules will not apply to this transaction from 1 April 2013.

21.5 If Mrs A’s son were employed because of the donation (regardless of the level of remuneration paid for the work they were doing) it could not be argued that the donation and the transaction were entered into independently of one another. The transaction would then be ‘tainted’ and the transitional provision would not relieve a charge under the substantial donor’s legislation.