Policy paper

Draft legislation (accessible version)

Published 21 July 2025

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Taxation of charities

1 Legacies to charities to be within scope of tax

  1. (1) Part 10 of ITA 2007 (special rules about charitable trusts etc) is amended as follows.
  2. (2) After section 523 insert鈥�
    1. 鈥�523A Legacies: income tax liability and exemption
      1. (1) This section applies to property received by a charitable trust under a testamentary disposition.
      2. (2) Income tax is charged on the property.
      3. (3) It is charged on the total value of the property so received in the tax year; and for that purpose the value of any property other than money is its market value as at the time of the disposition.
      4. (4) But property is not taken into account in calculating total income so far as it is applied to charitable purposes only.
      5. (5) The trustees of the charitable trust are liable for any tax charged under this section.
      6. (6) In this section, 鈥減roperty鈥� includes rights and interests of any description.鈥�
  3. (3) In section 540 (the non-exempt amount)鈥�
    1. (a) in subsection (3)(a) (definition of 鈥渁ttributable income鈥�), after 鈥渢he charitable trust鈥檚 income鈥� insert 鈥�(including any property received by it under a testamentary disposition)鈥�;
    2. (b) at the end insert鈥�
      1. (6) In subsection (3)(a), 鈥減roperty鈥� includes rights and interests of any description.鈥�
  4. (4) In section 562 (excess expenditure), in subsection (5) (definition of 鈥渘on-taxable sums鈥�), omit 鈥�, legacies鈥�.

2 Approved charitable investments: purpose test

  1. (1) Section 558 of ITA 2007 (approved charitable investments) is amended in accordance with subsections (2) to (5).
  2. (2) The existing text becomes subsection (2).
  3. (3) Before that subsection insert鈥�
    1. 鈥�(1) For the purposes of section 543, 鈥渁pproved charitable investment鈥� means an investment鈥�
      1. (a) that is of a type listed in subsection (2) and is made for an allowable purpose, or Draft Finance Bill Measures 1
      2. (b) that is not of a type listed in subsection (2) but that is approved under subsection (3).鈥�
  4. (4) In subsection (2)鈥�
    1. (a) for the words before Type 1 substitute 鈥淭he following are the types of investment mentioned in subsection (1)(a).鈥�;
    2. (b) omit Type 12.
  5. (5) At the end insert鈥�
    1. 鈥�(3) An officer of Revenue and Customs may approve a loan or other investment under this subsection if satisfied, on a claim, that it is made for an allowable purpose.
    2. (4) For the purposes of this section, an investment is made 鈥渇or an allowable purpose鈥� if it is reasonable to draw the conclusion, from all the circumstances of the case, that the investment is made for the sole purpose of benefiting the charitable trust.鈥�

3 Tainted charity donations: replacement of purpose test with outcome test

  1. (1) Section 809ZJ of ITA 2007 (tainted donations) is amended in accordance with subsections (2) and (3).
  2. (2) For subsection (5) substitute鈥� *鈥�(5) Condition B is that a linked person who is not a charity receives financial assistance鈥�
    1. (a) under or in connection with the arrangements, and
    2. (b) directly or indirectly from the charity to which the donation is made or from a connected charity.鈥�
  3. (3) In subsection (8), at the appropriate place insert鈥� 鈥溾�渇inancial assistance鈥� includes a loan, a guarantee, an indemnity or any form of investment (in each case, whether or not on arm鈥檚 length terms).鈥�
  4. (4) Schedule 1 contains connected amendments to the tainted charity donations rules in Chapter 8 of Part 13 of ITA 2007.

SCHEDULE 1

TAINTED DONATIONS

Income tax


  1. 1 Chapter 8 of Part 13 of ITA 2007 (tainted charity donations) is amended as follows.
  2. 2 (1) Section 809ZJ (tainted donations) is amended as follows.
  3. (2) In subsection (1)鈥�
    1. (a) the words from 鈥渋s a tainted donation鈥� to the end become paragraph (a);
    2. (b) after that paragraph insert 鈥�, and
      1. (b) becomes a tainted donation at the earliest time when all those conditions are met.鈥�
  4. (3) In subsection (2)(b), at the end of sub-paragraph (i) (but before the 鈥渁nd鈥� after it) insert 鈥渁s at the later of the time when the donation is made and the time when the arrangements are entered into鈥�.
  5. (4) In subsection (4), in the words before paragraph (a), for the words from 鈥渁 time鈥� to 鈥渢he following times鈥� substitute 鈥渁ny time after the earliest of the following times鈥�.
  6. (5) In subsection (8), in the definition of 鈥渜ualifying charity-owned company鈥�, for 鈥減otentially advantaged person鈥� (in both places it occurs) substitute 鈥渓inked person鈥�.
  7. (6) In subsection (10), for 鈥渁dvantages鈥� substitute 鈥渁ssistance鈥�.
  8. 3 Omit section 809ZK (circumstances in which financial advantage deemed to be obtained).
  9. 4 (1) Section 809ZL (certain financial advantages to be ignored) is amended as follows.
  10. (2) In the heading, for 鈥渁dvantages鈥� substitute 鈥渁ssistance鈥�.
  11. (3) In each of subsections (1) to (5), for 鈥渁 financial advantage鈥� substitute 鈥渇inancial assistance鈥�.
  12. (4) In subsection (2), for 鈥渇or whom it is obtained applies the advantage鈥� substitute 鈥渨ho receives the assistance applies it鈥�.
  13. (5) In subsection (4)(b) and (5)(b), for 鈥渢he advantage鈥� substitute 鈥渢he assistance鈥�.
  14. (6) In subsection (6), at the appropriate place insert鈥�
    1. 鈥溾�渇inancial assistance鈥� has the meaning given by section 809ZJ(8);鈥�.
  15. 5 (1) Section 809ZM (removal of income tax relief in respect of tainted donations etc) is amended as follows.
  16. (2) In the heading, for 鈥渋n respect of tainted donations etc鈥� substitute 鈥渨here donation becomes tainted in same year鈥�.
  17. (3) For subsection (1) substitute鈥�
    1. 鈥�(1) This section applies where鈥�
      1. (a) a person makes a relievable charity donation in a tax year, and
      2. (b) the donation becomes a tainted donation in the same tax year.鈥� *6 After section 809ZM insert鈥� *鈥�809ZMA Income tax charge where donation becomes tainted in later year
    2. (1) This section applies where鈥�
      1. (a) a person makes a relievable charity donation in a tax year (鈥渢he earlier tax year鈥�), and
      2. (b) the donation becomes a tainted donation in a later tax year (鈥渢he later tax year鈥�).
    3. (2) Income tax is charged under this subsection if the person who made the tainted donation鈥�
      1. (a) obtained an income tax relief in respect of the donation for the earlier tax year, or
      2. (b) otherwise was liable for less income tax than they would have been absent the donation. *(3) The amount of the tax charged under subsection (2) is equal to the difference between鈥�
      3. (a) the amount of income tax for which the person who made the tainted donation would have been liable for the earlier tax year if the donation had not been made, and
      4. (b) the amount of income tax for which the donor was in fact liable for the earlier tax year.
    4. (4) Income tax is charged under this subsection if that person or any other person鈥�
      1. (a) obtained an income tax relief in respect of an associated donation for the earlier tax year, or
      2. (b) otherwise was liable for less income tax than they would have been absent the associated donation.
    5. (5) The amount of the tax charged under subsection (4) is equal to the difference between鈥�
      1. (a) the amount of income tax for which the person who makes the associated donation would have been liable for the earlier tax year if the associated donation had not been made, and
      2. (b) the amount of income tax for which that person was in fact liable for the earlier tax year.
    6. (6) Tax charged under subsection (2) or (4) is charged for the later tax year.
    7. (7) The person liable for any tax charged under subsection (2) is the person who made the tainted donation.
    8. (8) The person liable for any tax charged under subsection (4) is the person who makes or made the associated donation.
    9. (9) In this section, 鈥渁ssociated donation鈥� and 鈥渋ncome tax relief鈥� have the same meaning as in section 809ZM.鈥�
  18. 7 (1) Section 809ZN (income tax charge where gift aid is withdrawn) is amended as follows.
  19. (2) In subsection (1)鈥�
    1. (a) in paragraph (a), for 鈥渢ainted donation鈥� substitute 鈥渞elievable charity donation鈥�;
    2. (b) after paragraph (a) insert鈥�
      1. 鈥�(aa) the donation becomes a tainted donation (whether in that tax year or a later tax year),鈥�.
  20. (3) After subsection (2) insert鈥�
    1. 鈥�(2A) Tax charged under this section is charged for the tax year in which the donation mentioned in subsection (1)(a) becomes a tainted donation.鈥�
  21. (4) In subsection (4), omit paragraph (c) (but not the 鈥渁nd鈥� after it).
  22. (5) In subsection (5) omit paragraph (b) and the 鈥渁nd鈥� before it.
  23. 8 (1) Section 809ZO (income tax charge where payment of trust income to charity) is amended as follows.
  24. (2) In subsection (1)鈥�
    1. (a) in paragraph (a), for 鈥渢ainted donation鈥� substitute 鈥渞elievable charity donation鈥�;
    2. (b) after paragraph (a) insert鈥�
      1. 鈥�(aa) the donation becomes a tainted donation (whether in that tax year or a later tax year),鈥�
  25. (3) After subsection (2) insert鈥�
    1. 鈥�(2A) Tax charged under this section is charged for the tax year in which the donation mentioned in subsection (1)(a) becomes a tainted donation.鈥�
  26. (4) In subsection (4), omit paragraph (d).
  27. (5) In subsection (5), omit paragraph (b) and the 鈥渁nd鈥� before it.
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