Guidance

Annex i: tax exemptions for charities

Updated 9 April 2026

1. Introduction

1.1

Charities can claim exemption from tax on most types of income and capital gains, if they’re applied to charitable purposes. Read Annex ii: non-charitable expenditure for more detail of what constitutes expenditure for ‘charitable purposes’.

From 6 April 2026 this includes income from legacies. Read section 9 of this annex for more information.

None of the new charity tax rules introduced in Finance Act 2026 presuppose there is a time limit in which exempted funds must have been spent on the charitable purpose.

Applying funds is different from expending them. Funds can be applied by investing them to accumulate income so that those funds can be expended on charitable purposes at a later date. That is sufficient to engage the exemption so long as the investment is a qualifying investment. Any later expenditure of the funds is dealt with under the non-charitable expenditure rules. There is no time limit by which funds need to be expended to qualify as charitable expenditure under the non-charitable expenditure rules. Read Annex ii for more information.

1.2

Once a body has been accepted as being a charity for tax purposes, it normally retains its charitable status until it ceases to exist either, in its original form or altogether.

2. Main statutory exemption

2.1

The main statutory exemptions from tax for the income of a charity are contained for:

• charitable companies — in sections 466 to 493 Corporation Tax Act 2010 (CTA 2010)
• charitable trusts — in sections 521 to 536 Income Tax Act 2007 (ITA 2007)

These exemptions relate to all charitable tax exemptions and are subject to the condition that income is applied to charitable purposes.

3. Income from land

3.1

The profits of a property business carried on by a charitable company are chargeable to tax under section 209 Corporation Tax Act 2009 (CTA 2009). Section 485 CTA 2010 provides an exemption from tax for the income of a property business.

3.2

The profits of a property business carried on by a charitable trust are chargeable to tax under Parts 2 and 3 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Section 531 ITA 2007 provides an exemption from tax for the income of a property business.

3.3

The exemption applies to income from property businesses both in the UK and overseas.

3.4

The exemptions do not apply to profits from buying and selling land or profits arising from the development of land.

3.5

If a charity is buying and selling land or property this may be treated as non-primary purpose trading. The profits of such a trade will be chargeable to tax under section 2 CTA 2009 or section 5 ITTOIA 2005.

Read more about trading in the Business Income Manual, chapter BIM20051.

3.6

If a charity sells land that has been held as an asset any gain will normally be a capital gain. Section 256 Taxation of Chargeable Gains Act 1992 (TCGA 1992) provides an exemption for capital gains provided the gain is applied to charitable purposes only. However, if a contract for the sale of land includes a provision for the charity to share in future profits (otherwise known as overage or slice of the action contracts) from the development of that land any such profits received will not be exempt; they will be chargeable under Part 8ZB CTA 2010 or Part 9A ITA 2007.

Read more about this in the Business Income Manual, chapter BIM60510.

4. Interest and other annual payments

4.1

Sections 475/476, 486 and 488 CTA 2010 and sections 532 and 534 ITA 2007 provide for an exemption from tax to charitable companies and charitable trusts respectively in respect of:

• all interest, Gift Aid donations and other annual payments
• any non-UK equivalent of such income which would otherwise fall to be assessed as foreign income

4.2

Any payment from one charity to another charity is taxable income in the hands of the recipient charity — section 523 ITA 2007 (trusts) and section 474 CTA 2010 (companies) refer. But it’s exempt from tax if it’s applied for charitable purposes only.

4.3

Section 488 CTA 2010 and Section 536 ITA 2007 provide for exemption from tax in respect of (amongst other things) dividends and other distributions received by charitable companies and charitable trusts respectively from companies not resident in the UK.

5. Trading income

5.1

A charity is exempt from tax on the profits of any trade carried on in the UK or elsewhere provided its income is applied solely to charitable purposes and which is either:

• exercised in the course of the actual carrying out of a primary purpose of the charity (section 478 CTA 2010 for charitable companies and section 524 ITA 2007 for charitable trusts)
• mainly carried out by beneficiaries of the charity (section 478 CTA 2010 and section 524 ITA 2007)
• a non-primary purpose trade the turnover of which falls below certain limits (section 480 CTA 2010 and section 526 ITA 2007)
• the profits arise from certain lotteries

5.2

The exemption from tax of a charity’s trading income is considered in detail in Annex iv.

6. Capital Gains Tax

6.1

Section 256 TCGA 1992 provides an exemption from tax on capital gains, provided the gains are applied for charitable purposes.

7. Foreign tax

7.1

Occasionally charities seeking to claim exemption from foreign tax from an overseas tax authority may request confirmation that they’re subject to UK tax. Certain Double Taxation Agreements provide that a resident of the UK will be entitled to exemption or relief from the foreign tax on certain types of income only if they’re subject to tax on that income in the UK.

7.2

Charities should be aware that a person is not regarded as subject to tax in the UK if the income in question is statutorily exempt from tax.

8. Fund raising events

8.1

Exemption from tax on the profits from fund-raising events is provided as follows:

• Section 483 CTA 2010 for charitable companies
• Section 529 ITA 2007 for charitable trusts

See section 29 of Annex iv of the charities detailed guidance notes

9. Income from legacies

9.1

Section 474A CTA 2010 and section 523A ITA 2007 provide for an exemption from tax in respect of gifts of property that are made by will to charitable companies and charitable trusts respectively, so long as the property is applied for charitable purposes.

9.2

Property that passes to a charity as a result of another beneficiary disclaiming a benefit will be ‘made by will’.

9.3

A gift of property is also treated as being made by will if

• The gift is made by virtue of a variation to the will after the persons death and
• The variation meets the provisions of s142 Inheritance Tax Act 1984 (amongst other things, this requires the variation to have been made within two years of testator’s death).

9.4

Property includes rights and interests of any description.

9.5

Will includes a testament, codicil and any testamentary disposition of property.

9.6

There is no timeframe in which a legacy donation needs to be expended so long as when it is, it is expended for charitable purposes.

Example

Mr A donates a sum of £100,000 from his estate to Charity B for the purpose of furthering the charity’s charitable objectives. Charity B cannot immediately expend the £100,000 on those charitable objectives. In the meantime, Charity B invests the £100,000 in qualifying stocks and shares to generate financial returns for the charity. By appropriately investing the £100,000 to accumulate income until Charity B can expend the funds on charitable purposes, Charity B has applied the income to charitable purposes. The exemption will be satisfied. Read section 8 of Annex II for guidance on when HMRC may challenge accumulations of income on the grounds that the income has not been ‘applied to charitable purposes only’.

Several years later Charity B sells some of the stocks and shares in which the £100,000 was invested. There is no time scale in which Charity B is required to do this. If the proceeds are expended on non-charitable expenditure, Charity B may lose an amount of tax relief in accordance with the non-charitable expenditure rules outlined in Annex ii. Conversely, if Charity B instead uses the proceeds to fund a project aligned to its charitable objectives, it will not lose tax relief under the non-charitable expenditure rules (in respect of that expenditure — it may still lose relief if it makes other non-charitable expenditure).