Significant changes to the treatment of charity tax are incoming with the Finance Bill 2025 – 2026 ('the Bill'). These reforms are due to take effect from 6 April 2026 and are the result of previous consultations (to which members of the Withers Charity team contributed). The key changes involve tainted donations, treatment of legacies and approved charitable investments.
Tainted Donations
In broad terms, a donation is tainted when a donor, or someone connected to them, enters into arrangements with a charity or a Community Amateur Sports Club ('CASC') intended to (as a main or one of the main purposes of the donation) allow the donor to gain a financial advantage.
Finance Bill 2025 - 2026: Key changes
The amendments contained in the Bill have the following ramifications in relation to tainted donations:
- Outcome (as opposed to motivation): Previously, the assessment of whether a donation was tainted focussed on the donor's purpose or motivation for making the donation. HMRC will now determine whether or not a donation is tainted based on the outcome of the arrangements. This means that even if a donor did not intend to secure a personal benefit, a donation can still be treated as tainted if the results of the arrangements provide a benefit on the donor (or connected person).
- New focus on Financial Assistance: The new rules replace the old focus on 'financial advantage' with the concept of 'financial assistance'. The result is a broader criterion, likely to capture a wider range of arrangements.
- Timing: The new rules apply to charitable donations made on or after 6 April 2026. Crucially, where underlying tainted donations were made before 6 April 2026, but a linked donation is made after that date, the earlier gift is to be treated as tainted at the time it was made.
Other changes
- Legacies to charities or CASCs: Legacies left to charities (or CASCs) will now be included within the definition of 'attributable income'. Consequently, legacies must be applied solely for the charity's charitable purpose otherwise it may incur a tax charge.
- Approved charitable investments: Approved charitable investments are categories of financial investments that charities can hold without them being treated for tax purposes as 'non-charitable expenditure' by HMRC. Previously, only one of the 12 recognised approved charitable investment types had to be made 'for the benefit of the charity and not for the avoidance of tax'. Under the new rules, to qualify for charitable tax relief, all 12 recognised investment types are subject to this requirement.
The changes are intended to close or correct what the government considered to be minor loopholes or aberrations in the current regime. For charities, the changes reinforce the importance of understanding the wider context in which donations are made, which is not necessarily a bad thing. But it remains to be seen whether the somewhat stricter approach will have a chilling effect on philanthropy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
