Whether through ad hoc charitable donations or a strategic programme of philanthropy, clients in Britain have a long history of ‘giving back’. Alana Petraske and Christopher Groves look at the options, and the tax reliefs available
There is no one-size-fits-all approach to philanthropy and charitable giving. The mode of giving that suits an individual’s circumstances at a given time may range from a ‘bespoke’ charitable foundation on one end of the spectrum to ad hoc direct gifts on the other. Between these two extremes, many donors will find giving through an intermediary such as a donor-advised fund or a community foundation to be the most suitable option.
The idea that the amount available for gifting determines the appropriate approach and structure is not a reflection of how philanthropic clients actually operate; a family may form a family foundation for their main philanthropic activity, but also use a donor-advised fund where they wish to give anonymously, and also make direct gifts out of personal funds. The table below lists the pros and cons of the various options available.
|Bespoke foundation||Donor-advised fund||Direct gifts|
|Provides focus and structure||Useful for tax planning||Can be entirely informal|
|Facilitates strategic giving||No administrative burden||No structure, no meetings|
|Useful for tax planning||Subject to administrative ‘fee’||No costs|
|Family involvement||Donor-advised – less control||May not be tax efficient|
|Gold standard’ for philanthropy?|
The foundation option
Individuals and families who wish to set up a philanthropic foundation to structure their giving are often attracted to the fact that it gives maximum control and can provide a focus and structure, enabling strategic giving and, for some, acting as a unifying focus for family members. A foundation is also useful in tax planning, since donors can make a single tax-relieved contribution (often at year end), and then charitable grants can be made at their own pace over time.
Foundations are seen by some as the ‘gold standard’ for philanthropy. They are appropriate for a donor who is serious about giving, and are also a way to create a lasting legacy with a structure that can receive bequests under will.
A donor-advised fund (DAF) is an arrangement that enables a donor to make an irrevocable gift to charity and then make recommendations from time to time about grant recipients. Donors may also be invited to suggest investment options. DAFs can be useful for tax planning in the same way charitable foundations can – the donor can make a single tax-relieved contribution, for example at year end, and then can generally suggest charitable grants at their own pace over time. Donors cover the cost of administering their gift.
This option removes the personal responsibility and time commitment involved in running a foundation and is likely to be a more ‘private’ option for those who prefer to be anonymous with respect to their philanthropy.
A donor can benefit a DAF during their lifetime or under a will with a charitable bequest and, depending on the DAF, a donor may be able to recommend grants to charitable projects located anywhere in the world.
In the UK, there are several DAFs, including the Charities Aid Foundation, NPT (UK), SharedImpact, Prism the Gift Fund, and Stewardship.
Community foundations may be seen as a type of DAF, in that they receive gifts tax-efficiently and allow donors to make recommendations as to the ultimate grant application. There are 46 across the UK and many more internationally. Community foundations foster local giving and also identify, and in many cases nurture, local charitable projects.
A philanthropic journey often begins by making one-off gifts to the charities of one’s choice. Some find it challenging to create and develop a strategic programme of philanthropy through direct gifts alone, and it is often at this point when alternative options are considered.
Direct gifts to charity may provide charitable tax relief if given to a charity in the donor’s own jurisdiction, but they do not provide the opportunity for tax planning that gifts to a bespoke foundation or a DAF do – tax relief will only be available at the time of the gift. However, this suits many donors perfectly well.
Gifts directly to charity can be as structured and specific as a donor wishes; many significant donations impose obligations on the grantee in relation to naming and attribution. Even donors interested in remaining anonymous may wish to impose a variety of conditions on their direct gifts, including reporting, inspection and other rights.
Corporate donors also operate along the spectrum of giving. Many businesses utilise a corporate foundation for philanthropic activity, sometimes alongside a wider programme of corporate social responsibility. Others find the DAF or community foundation option most convenient, and still others make direct gifts, retaining complete control over the choice of beneficiary.
UK tax reliefs
Many countries seek to incentivise charitable activity and charitable giving with tax reliefs. This often amounts to relieving the income and gains of charities themselves, as well as giving a deduction, credit or rebate in respect of donations to qualifying organisations. In the UK, such incentives are available to and in respect of organisations that are ‘charities’ for the purposes of UK tax.
Impact of Brexit
Traditionally, the UK took a territorial approach to charitable tax reliefs, including in relation to lifetime and testamentary gifts. That is, relief was available to UK taxpayers only to the extent gifts were made to resident charities formed under UK law.
However, in a European Court of Justice case Hein Persche (C-318/07), charitable gifts were treated as movements of capital subject to free movement principles, effectively introducing a ‘non-discrimination’ principle to cross-border charitable giving in the EU.
Although initially resistant to the Persche principle (and vocally so), the UK ultimately implemented schedule 6 to the Finance Act 2010 (FA 2010). The effect was the extension of UK charitable tax reliefs to qualifying organisations formed in the European Economic Area (EEA).
The precise manner of the UK’s exit from the EU remains unclear. If the UK remains broadly in the single market under the same terms as the other non-EU EEA states (the ‘Norwegian model’), maintaining the FA 2010 status quo would be consistent. However, if the UK merely remains in the European Free Trade Area (the ‘Swiss model’) or indeed, if the UK creates a new arrangement entirely (‘hard Brexit’), parliament might be tempted to return to the traditional territoriality of charitable reliefs, since the Gift Aid scheme involves the repayment of tax to eligible charities, rather than a straightforward income tax deduction or credit for the UK donor. However, considering that HM Revenue & Customs (HMRC) has actually only accepted around 10 per cent of foreign charity applications as satisfying the FA 2010 criteria since it was enacted, amending the FA 2010 may be a low fiscal priority.
The tax motive in philanthropy
It is sometimes wrongly assumed that philanthropic donors give in order to have the benefit of tax reliefs. Where used properly, a charitable donation is always a net loss to the donor, even if the ‘cost’ of the donation to the donor may be reduced by tax incentives.
However, once a decision has been made to make a donation, most donors wish to give as tax-efficiently as possible.
All UK taxpayers are able to make tax-efficient gifts of cash to eligible charitable organisations that are established in the UK or (at least for the time being) in any EEA country. This relief is given through the Gift Aid scheme, which effectively shares tax relief in respect of donations from higher and additional rate tax-payers between the donor on the one hand and the recipient charity on the other.
This effective split of tax relief is an unusual arrangement when considered globally, and is achieved in two steps. The first is the charity’s basic rate reclaim, in which the recipient charity may claim directly from HMRC an amount equivalent to the basic rate of tax the donor is deemed to have paid in respect to the donation amount. The second is the donor’s higher (or additional) rate relief, in which the donor, being a higher (or additional) rate taxpayer, may claim relief on their self-assessment tax return on the full sum of the donation as taxed at higher / additional rate, less the basic rate tax that the charity will reclaim: see the table below.
|Cash position of|
|Donor earns £150,000||£150,000|
|Donor pays higher rate tax at 40 per cent||(£60,000)||£60,000|
|Donor makes cash gift of £120,000 to charity||(£120,000)||£120,000|
|Charity reclaims basic rate tax from HMRC||£30,000||(£30,000)|
|Donor receives higher rate tax relief||£30,000||(£30,000)|
The Gift Aid scheme applies to gifts of cash to an eligible charity, provided: a gift aid declaration is made by the donor; any benefits are within permitted limits; and the donor has paid a sufficient amount of UK tax to ‘frank’ the basic rate Gift Aid reclaim.
Those taxed on the remittance basis are not excluded from Gift Aid, and in fact may have additional efficiencies when structuring their giving.
Gifts of land and qualifying shares and securities
Donors of land or qualifying investments to a ‘charity’ for UK tax purposes are able to deduct the market value for the purposes of their personal income tax calculation, and will not be liable to pay any capital gains tax (CGT) on the transfer. It is important to note that the recipient charity does not claim any relief in respect of such a gift. In some scenarios, it may be more tax-efficient for the donor to dispose of the assets commercially and then donate the proceeds of sale to the selected charity under the Gift Aid scheme.
Works of art
The UK has a limited scheme of tax relief for giving works of art to charity. Unlike some other jurisdictions, the only gifts (whether lifetime or testamentary) relieved are those that are made to the nation, so gifts to a family foundation, or even an operating charity, will not be fully relieved. In addition, the total value of the relief is capped annually in aggregate, so some donors may be too late in a given year to benefit from the relief.
In brief, gifts of qualifying works – referred to as ‘pre-eminent objects’ – can be relieved if accepted by the Department for Culture, Media and Sport for display at national museums and galleries. This Cultural Gifts scheme is run in tandem with its predecessor, the acceptance in lieu scheme, which allows an inheritance tax (IHT) liability to be settled in some cases with qualifying heritage property.
Any legacies to a charity are, for UK tax purposes, free from IHT – a long-standing relief. In addition, since 2012, if an individual leaves 10 per cent or more of their taxable estate to charity, then the rate of tax on the balance is reduced to 36 per cent. This is a 10 per cent reduction from the main rate of 40 per cent.
For those who intend to leave 10 per cent or more of their taxable estate – broadly, the amount after IHT reliefs and exemptions – to charity, the lower rate of IHT represents a benefit to their heirs. The incentive’s real power will be to those individuals whose estate would come within the scope of IHT and who would have given between 4 per cent and 10 per cent of their taxable estate to charity.
As can be seen from the example table below, an individual who would have left a 4 per cent legacy to charity under the old regime could, under the new regime, leave the same amount to their non-charitable beneficiaries after tax, even if the charitable gift is increased to 10 per cent of the net taxable estate.
In other words, depending on the value of the originally intended legacy, a donor may be able to ‘top up’ the legacy to 10 per cent without taking away from the amount ultimately enjoyed by the non-charitable beneficiaries. A 10 per cent gift on death under the new regime will also be more tax-efficient than making a comparable lifetime gift via Gift Aid.
That a donor may more than double the intended legacy amount without taking away from the non-charitable beneficiaries of the estate is a compelling incentive.
In some circumstances, ‘topping up’ the gift to 10 per cent may even result in the non-charitable beneficiaries receiving more due to the application of the reduced rate.
International and ‘offshore’ charities
As individuals become more mobile, it is increasingly common when setting up a personal or family philanthropic foundation to consider tax efficiency among other relevant factors when choosing a jurisdiction for establishment.
Key factors when choosing a jurisdiction for a philanthropic foundation include the following:
- where the donor and relevant family members have a liability to tax
- what tax reliefs may be available there for charitable donations
- where the donor and relevant family members have existing structures – some prefer to keep everything together, others may found a charity in an onshore jurisdiction even while keeping their private wealth structures offshore
- what the donor wishes to fund – there are differences across jurisdictions which may be material to the donor
- where the projects are located that the client is likely to want to fund – some jurisdictions require money to be spent in-country (‘local benefit’ restrictions), while others permit overseas grants
- what the donor’s attitude to disclosure and transparency is – whether a highly regulated jurisdiction is desirable or not language – the need to translate documentation can be a practical consideration
- administration – the donor is likely to want a jurisdiction where administrative support is available and may also wish to use professional trustees, which are more commonly accepted in some jurisdictions that others.
An effective exercise would be to weigh up these variables to arrive at one or two realistic options that can be considered in more detail. It may be sensible to consider one or more alternative venues for establishment – such as the Isle of Man, Jersey, Bermuda or the Cayman Islands, which may offer an attractive and flexible alternative where UK tax relief is not a substantial motivation for the donor.
It is worth noting that charities are not exempt from the largest of the recently introduced transparency initiatives, the Organisation for Economic Co-operation and Development’s Common Reporting Standard (CRS).
The CRS is an information exchange regime aimed at international tax transparency: ‘financial institutions’ are required to pass information about their account holders to HMRC for onward exchange to tax authorities around the world. The aim is to prevent the the use of offshore structures to evade tax, and charities are not exempt. In the UK, HMRC implementation guidance has now been updated to indicate that a charity formed as a charitable trust will have to undertake due diligence and annual HMRC reporting on those of its charitable beneficiaries that are tax-resident in a jurisdiction participating in the CRS. Family philanthropic trusts are among those most likely to be caught, and trustees and their advisers should not ignore this new element of compliance.
In a related vein, foundations set up as charitable companies are now required to maintain a register of ‘persons with significant control’ under a domestic transparency regime. No reporting on foundation grantees is required, however.
Philanthropy often flows directly from a client’s passion and can be a hugely meaningful aspect of a client’s life. It is often used as teaching tool for the next generation in a family context, and can be a positive force in family governance more generally. Private client advisers who ignore this important area miss an opportunity to deepen their relationship with clients as well as to help their clients improve their experience of giving back.