Philanthropy – what are your options when it comes to giving to charity

Philanthropy is a core part of many families' and family businesses' long-term goals and wealth plans. In the UK, 2023 saw another record year with £13.9billion donated to charity. Whilst tax relief is not normally a primary motivator for this activity, there are valuable reliefs available to donors that can allow for a gifting strategy to be important.

In this article, we explore some less well-known options for giving to charity, the reliefs associated with them and how families and businesses can structure their philanthropic objectives to make best use of these.

What is a charity?

In order to qualify for tax relief a donation must be made to a charity (or in some cases Community Amateur Sports Club). Charities can have different formal structures (see below) and many but not all charities are registered with the Charities Commission. In order to qualify for gift aid a charity must have obtained an HMRC charity reference number.

What tax relief is available for gifts to charities?

A gift to charity can be made in several ways and each has different tax implications. The reliefs for individuals and companies under the gift aid regime and the corporate deduction regime respectively are relatively well known but we will highlight some often-overlooked points.

The other mechanisms that we will cover in this article are as follows:

  • Gift of land or other assets to charity
  • Establishing your own charity
  • Using a Donor Advised Fund
  • Gifting to charity in your Will

Direct individual donations

When considering making a donation and a claim for gift aid relief the following points are often overlooked:

  • Tax relief on claims can be carried back to the previous tax year, so long as the return for that year has not yet been submitted (e.g. if a donation is made on the 1 January 2025, tax relief can be claimed on the tax return for the year to 5 April 2024 so long as this has not yet been submitted).
  • Where the level of the donation extends the income rate bands such that part of the gift does not benefit from further relief, a claim can also be made to extend the capital gains tax rate bands, to reduce the rate of tax paid on gains.
  • Where there is insufficient income or capital gains tax payable to cover the amount of the gift aid claimed by the charity, the donor becomes liable for this via their tax return.
  • There are strict rules that apply to benefits that may be obtained by an individual or anyone connected with them for these purposes, as a result of the donation.

Direct corporate donation

  • Companies that make direct gifts to charity can normally include the expense as an allowable deduction in the computation of their taxable profits.
  • Such a gift cannot create or augment a loss for tax purposes.
  • The same donor benefit rules that apply to individuals also apply to companies.

Gift of land or other assets to charity

Tax relief is available where qualifying land, buildings or other qualifying investments are given to charity.

Relief is given in a different way to a claim for gift aid relief, which changes the rate of tax paid on income or gains. Instead:

  1. The value of the asset gifted is taken as a deduction against income before tax is applied. For example, if an individual has a total income of £200,000 and gifts a qualifying asset to a charity worth £80,000, their taxable income will be reduced by £80,000 to £120,000.
  2. Such a transfer is treated as not giving rise to a gain for capital gains tax purposes, saving tax that may otherwise have been due on a sale.

To qualify a gift must be made of (in summary and subject to detailed criteria):

  • Shares or securities listed on a recognised exchange in the UK (including AIM) or overseas.
  • A freehold or leasehold interest in UK land.

The income tax relief can only be claimed in the tax year that the gift was made (unlike gift aid relief).

Where a gift is made of land that continues to be used by the donor or is available for their enjoyment or benefit, relief would not be available.

Establishing your own charity

For families or family businesses who would like to take a more structured and long-term approach to their philanthropy, a charity can provide a generational tool, creating a focal point for the family or organisations charitable endeavours.

A charity can mean the family has control over when donations are made that will qualify for gift aid or other tax reliefs, to allow this to be timed with the receipt of income by family members to obtain maximum tax efficiency. The funds would then remain within the charity to be invested, with donations then made to other charitable causes from the fund in the future.

The process of setting up a charity is not straightforward and, if the charity's annual income exceeds a certain amount (or if it is to be a charitable incorporated organisation) an application must be made for it to be registered with the Charity Commission.

Making an application involves providing key documentation and detail on what the 'charitable purpose' (or 'charitable objects') of the charity will be and how it will operate in practice. In all but the most straightforward of cases, the Commission will scrutinise the application closely to ensure that the purposes are exclusively charitable and that the charity is not designed in any way to benefit the family, the family business, or other private interests.

There are four main structures that can be used when setting up a charity. These are:

1.   A charitable trust

2.   A charitable company (limited by guarantee as opposed to shares)

3.   A charitable incorporated organisation (CIO)

4.   An unincorporated association

Each has its own advantages and choosing the best structure means thinking about how the charity will be funded, how large it is intended to be, what its objectives are and who will be involved.

Whatever a charity's structure, its trustees will be required to operate under the terms of its governing document, which sets out what the purpose of the charity is and provides guidance on matters such as how trustees should be appointed in the future, and what rights and powers they have.

There is then ongoing administration associated with running a charity. Charities are required to report annually to the Charity Commission, submitting an annual return and, where their income is greater than £25,000 per year, an annual report, and annual accounts. For larger charities, an independent examination or audit of the accounts can be required.

Using a Donor Advised Fund (DAF)

A DAF provides an alternative to setting up a new charity. Organisations have a master charitable trust to which individuals can make irrevocable donations of cash or assets, obtaining tax relief at the time of the gift.

The funds are then held within the trust, for the individual or family to direct to causes as when they see fit. This provides the same tax efficiencies as managing donations via a family charity, but reduces the public profile and some of the administration. The funds are normally invested so that income is available each year to add to the amount available for gifting.

DAFs are offered by a number of banks and investment advisors, the Charities Aid Foundation, and community foundations around the country.

Gifting to charity in your Will

Leaving a legacy to charity in your Will can be very tax efficient, for two reasons:

Firstly, donations to charity are themselves not subject to inheritance tax.

Secondly, if you give at least 10% of your net estate to charity, the inheritance tax rate applying to the remainder of your taxable estate can reduce from 40% to 36%.

This can require careful planning depending on the level and type of assets that you hold at death and the manner in which they are held.

When done correctly, the tax saving can mean that the reduction in the amount that your beneficiaries receive may be only a small proportion of the amount accruing to the charity or charities.

Your Will would need to state the percentage of your estate, specific asset or cash amount that you would like to give and a clear indication of the recipient charity or charities (such as the charity number).

It is important that your Will is drafted appropriately and is legally valid.

How can we help?

Whatever your circumstances, we can advise on the suitability of your different philanthropic options, and prepare the relevant documentation required in each case.

Get in touch with one of our team below to find out more.

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