Do charities pay tax on investment income

Q: What mistakes come up most often?

Treating development profit as rent. A charity that builds and sells, or keeps an overage right, has taxable income, not exempt property income. Lending to connected businesses. Annex iii gives the example of a £1 million loan to a company with a trustee on its board, funded by that company's own donations; it was not for an allowable purpose and became non charitable expenditure. Leaving reserves idle. Large cash balances held without an investment policy invite HMRC to argue the income has not been applied. Not ticking the investments box. Box E26 on the CT600E, or the equivalent SA907 question, confirms all investments and loans qualify. Answering it without checking is a common error. Assuming legacies were always exempt. Gifts by will are expressly exempt from 6 April 2026; see charity legacy income. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

A charity pays no tax on its interest, dividends, rents from letting property or capital gains, provided the income or gain is applied for charitable purposes. The exemptions are in sections 521 to 536 of the Income Tax Act 2007 for charitable trusts and sections 466 to 493 of the Corporation Tax Act 2010 for charitable companies, with section 256 of the Taxation of Chargeable Gains Act 1992 covering gains. Profits from dealing in or developing property are not covered, and any spending on non charitable purposes, including investments that do not qualify, removes an equal amount of the exemption.

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Which investment income is exempt?

HMRC’s Annex i to its charities detailed guidance lists the main statutory exemptions, and every one carries the same condition: the income must be applied to charitable purposes. For investment income the important categories are these.

Income	Charitable trust	Charitable company
Interest, including anything treated as interest	ITA 2007 s532	CTA 2010 s486 (non trading loan relationship profits)
Dividends from UK companies	ITA 2007 s532	CTA 2010 s486
Dividends from non UK companies	ITA 2007 s532 and s536	CTA 2010 s486 and s488
Rents and other property business profits, UK and overseas	ITA 2007 s531	CTA 2010 s485
Royalties and other annual payments	ITA 2007 s536	CTA 2010 s488
Capital gains	TCGA 1992 s256

Section 532 of ITA 2007 names interest, dividends and other distributions of UK resident companies, dividends of non UK resident companies, purchased life annuity payments and profits on disposals of deeply discounted securities. Section 486 of CTA 2010 gives the company equivalent and says the exemption requires a claim, as does section 485 for property income. In practice the claim is made through the charity supplementary pages of the return, CT600E for a company and SA907 for a trust. If the charity is a trust, the wider picture of trust exemptions is covered in charitable trusts: tax exemptions and conditions.

Do charities pay tax on UK dividends?

Not on dividends paid now. GOV.UK states that charities pay tax on dividends received from UK companies before 6 April 2016, which reflects the old tax credit that charities could not reclaim. Dividends received today fall within the savings and investment exemption above, so long as they are applied for charitable purposes. Dividends from overseas companies are also exempt in the UK, but any tax withheld abroad is a separate question. HMRC Charities can only repay UK tax, and a charity wanting foreign withholding tax back must apply to the tax authority of that country. Annex i also warns that some double taxation agreements give relief only to a UK resident who is subject to tax on the income, and a charity is not regarded as subject to UK tax on income that is statutorily exempt.

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When is rent from property exempt, and when is it taxed?

Rent and other profits of a property business, in the UK or overseas, are exempt under section 531 of ITA 2007 or section 485 of CTA 2010. The exemption does not reach profits from buying and selling property or from developing it. HMRC says a charity that buys and sells property may be carrying on a non primary purpose trade, taxed under section 5 of ITTOIA 2005 or section 2 of CTA 2009, and the trading rules in charity trading and trading subsidiaries then apply.

Selling a property held as an investment normally produces a capital gain, exempt under section 256 if applied for charitable purposes. The trap is overage, sometimes called a slice of the action: if the sale contract gives the charity a share of future development profits, those receipts are not exempt and are taxed under Part 8ZB of CTA 2010 or Part 9A of ITA 2007.

Are capital gains on investments exempt?

Section 256(1) provides that a gain is not a chargeable gain if it accrues to a charity and is applicable and applied for charitable purposes. Selling shares in a managed portfolio, or a building held as an investment, therefore produces no Capital Gains Tax or Corporation Tax on the gain. Section 256(2) adds a charge where property ceases to be held on charitable trusts: the trustees are treated as selling and reacquiring it at market value, and that gain is treated as not accruing to a charity, so it is taxable. HMRC can assess that charge up to 3 years after the end of the tax year in which the property left charitable trusts.

What does applied for charitable purposes mean for money that is invested?

This is the condition that most often causes difficulty. HMRC’s Annex i says that applying funds is different from spending them. Investing income to accumulate it for later charitable spending counts as applying it, provided the investment is a qualifying investment. There is no time limit by which the money has to be spent, and later spending is tested under the non charitable expenditure rules.

HMRC will still challenge accumulations in some cases. Annex ii gives two examples: income that is not invested at all but kept in cash or a current account, and investment decisions that are not made exclusively for the benefit of the charity, such as a project where a trustee or funder has a conflicting interest.

Which investments qualify?

Sections 558 of ITA 2007 and 511 of CTA 2010 list the approved charitable investments. HMRC’s Annex iii summarises them as charity common investment and deposit funds, interests in property (unless held as security for a debt), shares or securities listed on a recognised stock exchange, units in unit trusts, shares in open ended investment companies, bank deposits other than back to back arrangements, certificates of deposit, and any other loan or investment made for the benefit of the charity and not for tax avoidance.

For investments acquired on or after 6 April 2026 there is an extra test. The investment must be made for an allowable purpose: the sole purpose of benefiting the charity, or that purpose plus purposes that are merely ancillary or incidental, and not for the avoidance of tax by the charity or anyone else. Trustees should keep contemporaneous evidence of why they made each investment. For an investment loan HMRC will normally accept a commercial rate of interest that is actually paid and pursued, adequate security, and a formal written agreement with reasonable repayment terms.

What happens if an investment does not qualify?

A qualifying investment is not expenditure at all, so it never reduces relief. A non qualifying investment or loan is treated as non charitable expenditure under section 543 of ITA 2007 or section 496 of CTA 2010. The charity then loses exemption on an equal amount of its attributable income and gains, which include Gift Aid, interest, rental income, primary purpose trading profits, legacy income from 6 April 2026 and gains. The charity cannot set its charitable spending against attributable income first.

HMRC’s own example: a charity has gross Gift Aid of £28,000 and gross bank interest of £3,000, so £31,000 of attributable income. It spends £10,000 on grants and administration and makes a non charitable loan of £7,000. Exemption is withdrawn on £7,000 of the £31,000, even though the charity spent more than that on its purposes. The charity can choose which sources the restriction is applied to by notifying HMRC within 30 days of being told of the restriction, and it must file a return and pay the tax. Where non charitable expenditure exceeds attributable income, the excess is carried back to earlier periods.

Can a charity reclaim tax deducted from investment income?

Yes, where UK Income Tax has been deducted at source. HMRC’s Chapter 6 lists bank and building society interest, interest from government stocks, wayleave payments, royalties, other annual payments, estate income and discretionary trust income. The claim goes through Charities Online or form ChR1, the same route used for Gift Aid repayment claims, and the charity must first be recognised by HMRC and hold a charity reference number.

What mistakes come up most often?

Treating development profit as rent. A charity that builds and sells, or keeps an overage right, has taxable income, not exempt property income.
Lending to connected businesses. Annex iii gives the example of a £1 million loan to a company with a trustee on its board, funded by that company’s own donations; it was not for an allowable purpose and became non charitable expenditure.
Leaving reserves idle. Large cash balances held without an investment policy invite HMRC to argue the income has not been applied.
Not ticking the investments box. Box E26 on the CT600E, or the equivalent SA907 question, confirms all investments and loans qualify. Answering it without checking is a common error.
Assuming legacies were always exempt. Gifts by will are expressly exempt from 6 April 2026; see charity legacy income.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.