Whether we want to do our bit for the planet or just need to tackle that long overdue wardrobe clear-out, we have all found ourselves staring at clothes that need a new home. Often they would be bagged together and dropped off at the local charity shop, not only for a good cause but also as it was the simplest way to deal with it.

Nowadays, with the rise in e-commerce, it is just as easy to take a few pictures and have your clothes listed for sale, or for your charity shop to do this for you. As with most things in life, tax finds a way to involve itself so this article seeks to ensure you are aware of tax implications and how to make sure you benefit from those that apply to you.

Gift Aid

You have probably seen Gift Aid mentioned by nearly all charities when you are making a donation, but what exactly is it?

Gift Aid is a government scheme designed to boost the value of money donations made to charities by allowing them to reclaim the basic rate tax on your donation. For every £1 you donate, charities can claim an additional 25p from HMRC, making your donation go further without any extra cost to you. This is effectively the basic rate tax you have paid to HMRC, going to the charity instead.

There is also higher and additional rate tax relief available on these charitable donations, which can be claimed through your Self Assessment tax return.

To qualify for Gift Aid, you must have paid income or capital gains tax equal to the amount of tax being claimed by the charity, from HMRC. You will then need to complete the charity’s simple Gift Aid declaration, providing some basic details and confirming that you have paid sufficient income or capital gains tax. The charity will then arrange for the basic rate tax to be collected from HMRC.

If you have not paid sufficient tax, you are required to settle the difference through your Self Assessment tax return, as a Gift Aid charge.

Donating clothes

When you donate clothes to a registered charity, you’re giving them something valuable they can sell in their shops or distribute to those in need. However, the money raised from selling donated goods does not qualify for Gift Aid by itself.

What instead the charity can do, is act as your agent and sell the donated goods on your behalf.

You would then agree for the sale proceeds, less any commission charged by the charity, to be donated to the charity, and Gift Aid claimed on that donation.

A Gift Aid declaration form will need to be signed in the normal way.

It’s important to note that Gift Aid can only be claimed on the sale value of donated goods, not on their original purchase price. So, if you bought a shirt for £50 but the charity sells it for £15 after commission, Gift Aid would only apply to the £15 value.

Selling clothes

With the rise of platforms and websites dedicated to selling your pre-loved clothes such as Vinted and Depop, it is easier now than ever before to pass on your clothes to a new home, especially when some charities are full on donated stock and are refusing further donations.

You may have seen the clamour raised when HMRC announced that from 1 January 2024, they will require platforms such as Vinted, Depop and eBay to collect information on users and pass that to HMRC. This is triggered when specific conditions are met, such as making 30 or more sales per year or earning over £1,700.

This information alone does not mean HMRC will come knocking at your door, forcing you to pay tax on everything you have sold in the year. With this information, HMRC are trying to identify traders who for one reason or another are not reporting their trade to HMRC. They are not trying to tax you on a few t-shirts and jumpers you have decided no longer belong in your wardrobe.

Are you a trader?

Whilst there is no one definition of a trader, they will regularly sell goods or services with a view to making a profit on those transactions. HMRC have a badges of trade test that can help determine whether an activity is trading or not.

Some of the considerations are:

• Is there an intention to make a profit?
• How many transactions are there?
• Was the asset modified or improved to achieve a greater profit or increase saleability?
• How quickly was the asset sold after purchase?

If you are deemed to be a trader, you may still not have any tax to pay as there is a £1,000 trading allowance available. This is used to reduce your turnover and is an alternative to claiming expenses. Effectively, you would claim the trading allowance if you had expenses less than £1,000 and you were not loss-making.

If your turnover is above £1,000, you would need to register for Self Assessment and file a tax return.

If you do receive a nudge letter from HMRC, or if you are unsure whether you are a trader, please do seek advice so your position can be reviewed. HMRC rarely accept ignorance of the law as a reasonable excuse.

What if you’re not a trader?

If you are not deemed to be a trader, you are not liable to pay income tax on the items you sell, but you would, however, fall into the capital gains tax (CGT) regime. This would look at the capital gain or loss on a per-item basis.

Whilst you may start to think HMRC have destined you to pay tax on these sales, there are special rules for “chattels”, which include your personal possessions i.e., clothes. The main rule that is of benefit, is that there is no liability to CGT if the disposal proceeds do not exceed £6,000. This should cover most of the clothing you would sell, unless you have some particularly expensive or rare items.

If you do sell an item that exceeds £6,000 but is less than £15,000 there are further rules that would limit the chargeable gain. In addition to this, there is the annual exempt amount that as of 6 April 2024 is £3,000, and reduces the taxable capital gain. Any amount in excess of this would be chargeable at 10% or 20%.

The likelihood is that you will make a loss on the sale of your clothes, in which case you have no liability to tax, either under income tax as a trader or under capital gains tax as a non-trader.

Conclusion

Whether you are donating or selling your pre-loved clothes, there are tax considerations you need to be aware of.

In most cases, the charity will be able to benefit from the tax laws by claiming Gift Aid, and you may be able to benefit as well if you are a higher or additional rate taxpayer.

Gift Aid declaration forms are very simple to complete and can even be backdated to gifts made in the previous four years. It’s free money for the charity and doesn’t cost you a penny more, provided you have paid the tax being claimed back if you are selling your surplus clothes you are unlikely to be subject to tax.

All good reasons to find ways to give your clothes a second life.