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Tainted donations



The rules relating to tainted charitable donations are anti-avoidance measures principally aimed to deter the abuse of tax reliefs through charitable giving. In most cases, where a donation is tainted, the donor will lose any such tax relief and may be liable for any tax reclaimed by the recipient charity through Gift Aid. However, the recipient charity may also face penalties if they are knowingly a party to the tainted arrangement.

When does a donation become tainted?

In broad terms, the rules deny tax relief on donations made to a charity where the donor (or a person connected with the donor) has entered into an arrangement under which they receive a financial advantage from the charity.

The following three conditions must be met:

  1. A donor (or a connected person) enters into an arrangement with a charity, and it is reasonable to assume that the donation and the arrangement would not have been entered into independently of each other. It does not matter whether the donation or arrangement is made first.
  2. The main purpose (or one of the main purposes) of the arrangement is for the donor to obtain an advantage directly or indirectly from the charity or a connected charity. This purpose test is key.
  3. The donor is neither a company wholly owned by one or more charities, nor a non-profit registered provider of social housing. This condition ensures that wholly owned trading subsidiaries that donate profits to their parent charity are not caught.

What should charities look out for?

Where a charity is party to the arrangement that tainted the donation and aware of the financial advantage, the charity would become jointly liable with the donor for the tax that the charity would otherwise have claimed through Gift Aid. Charities should therefore be aware of the tainted donation rules and take care to ensure they are not unknowingly caught out.

The definition of “connected person” under the rules is particularly wide. As well as spouses, civil partners, relatives, spouses and civil partners of relatives, and relatives of spouses or civil partners, the definition includes: two people living together as spouses or civil partners; close companies; and beneficiaries, trustees and settlors of a trust.

“Financial advantage” is also cast widely and includes the following types of transactions: selling, renting or exchange of property (either to or from the charity); provision of services; provision of a loan or other financial assistance; and the opportunity to invest in a business. Crucially, the terms of the transaction must either be more beneficial to the donor or less beneficial to the other party (often the charity) than would have been obtained in an arm’s length transaction. For example, a donor donates £5,000 to a charity on the understanding that the charity will provide an interest-free loan of £10,000.

The donation and the arrangement must also be mutually dependant – the donation would not have been made unless the financial advantage was included, and the financial advantage would not have been provided unless the donation was made. An interesting example here is free Wills schemes, where charities pay for the provision of a Will writing service to a testator, in the hope that the charity might receive a legacy under the Will. Such schemes would be caught if the Will writing service were only available in exchange for a legacy being made to the charity. As charity legacy officers will be aware, the charity rarely expresses any form of obligation to benefit the charity in exchange for the free will – rather it is expressed as a hope that the testator might consider a gift to the paying charity. Care should of course be taken to ensure any such services do not fall foul of the rules.

Awareness on the part of the charity is necessary for liability to arise. However, this can simply be an awareness of the existence of the arrangement – it need not be an understanding of the repercussions for the donor or for the charity. Charities should therefore be alive to such arrangements and take care to avoid the risk of liability by not entering into transactions where a donor to the charity (or someone closely connected to them) may be set to benefit.  

If you require further information about anything covered in this briefing, please contact Lucy Sharp or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, April 2023

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About the authors

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Lucy Green


Lucy is a Private Client lawyer, whose work involves a broad range of legal matters for individuals, family offices, trusts and institutions.

Lucy is a Private Client lawyer, whose work involves a broad range of legal matters for individuals, family offices, trusts and institutions.

Email Lucy +44 (0)20 3375 7691
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