The draft Finance Bill 2025-26 contains changes which relate to charity taxation. The ICAEW has recently responded to these changes, highlighting ways these could have an adverse impact on some charities.
Approved charitable investments
The most concerning proposed change is in respect of approved charitable investments. “Approved charitable investments” for both charitable companies and charitable trusts are investments which are not treated as non-charitable expenditure and so do not cause the charity to lose part of its charitable exemptions.
For trusts, it is intended that the legislation be altered to replace the existing test (that the investment must be made for the benefit of the charity and not for the avoidance of tax) with a new test (that the investment is made for the sole purpose of benefiting the charitable trust).
This is just in the legislation which governs trusts, not charitable companies. The concern is that this sole purpose test will exclude some investments that should be eligible for the exemption.
Some charities have a legitimate secondary purpose that influences an investment decision (e.g. the environmental or social impact of the investment).
Also, this test would be difficult to meet where there is a loan or other investment by a charitable trust to its trading subsidiary as this would also benefit the subsidiary.
It could also apply where there is a personal benefit which is incidental to the public benefit purposes of the charity. For example, some universities have equity sharing arrangements where they jointly purchase a property with a faculty member for use as the member’s accommodation.
The ICAEW’s recommendation is that the words “for the sole purpose of” be replaced with “wholly or mainly for the purposes of”.
They would also like to see the updated legislation confirming the nature and features of the claim that needs to be made for HMRC to confirm that the investment has been made for an allowable purpose.
Tainted donations
Gift Aid is denied where a donation is “tainted”. At the moment the test for being tainted is a motive test i.e. the intention is for there to be a financial advantage to the donor.
The proposed test for charitable trusts would look at if there is an actual financial advantage.
There is concern that such a benefit may arise after a genuine charitable donation through the actions of the charity which are not within the donor’s control, stopping them receiving tax relief.
There is also no provision to allow for the case where the donor compensates the charity for the benefit. The ICAEW propose that the existing rules not be altered for these proposed changes.
Legacies
The proposed changes will state that for charitable trusts a legacy is subject to income tax unless it is spent on the charity’s charitable purposes.
The ICAEW is concerned that there is no deadline by which the amounts must be spent and there is a risk that this means the income is taxable if the money is not spent by the time the tax return is filed.
They propose that this particular change not be made as this may discourage potential donors from leaving gifts to charities on death.
Next Steps
Please get in contact with us to understand fully how these changes might impact your charity.
This article has been co-written by Judith Pederzolli and Rachel Blunt from our Business Tax team.
Please note that this content is not intended to give specific technical advice. It is designed to highlight some of the key changes rather than provide an exhaustive explanation of the topics. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.