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27 Jun 2019
9 things to know about the world of charitable giving
Are philanthropic pursuits part of your financial planning for the year ahead? Navigating this highly regulated area can be tricky, but there are lots of rewards including certain tax reliefs for both donors as well as charities. Here are some of the things you need to know about being effectively altruistic.
1. The world of philanthropy is being redefined
Philanthropy has entered its next phase, with a new breed of successful individuals viewing giving back as one of the privileges of their self-made success. Alongside that, the world of charitable giving is changing. For a start, it’s not only Baby Boomers and Gen X, established in their careers and finances, who want to make an impact with their money. Altruism is seemingly ingrained in the Millennial mindset, with those born between 1981 and 1995 the UK’s largest donor cohort, giving £2.7bn to charity in 2017.
In recent years, an ‘effective altruism’ movement, started in the UK, has started to spread worldwide. Created by Oxford University academics and realised through organisations such as Giving What We Can, it takes an evidence and reason based approach to determining the most effective ways to do good.
“It encourages people to make gifts over their lifetime,” says Anna Josse, CEO at Prism the Gift Fund, a registered charity that administrates the giving of HNW individuals and foundations. “And that by analysing charities, you can identify the most effective ways of giving.”
The philanthropist’s role is also changing – business leaders are now using their entrepreneurial skills alongside their cheques. See the health programmes of the Bill & Melinda Gates Foundation in the developing world, or fellow ‘philanthropreneurs’ Jeffrey Skoll (whose Skoll Foundation is the world’s largest foundation for social entrepreneurship), and Sir Richard Branson and the Elders initiative.
2. Both charities and donors can benefit
The UK introduced a scheme called Gift Aid in 1990 to support charitable giving to registered charities by allowing them to effectively increase the value of their donation by reclaiming income tax suffered by the donor. Whilst the scheme has evolved over time, the main principles remain the same.
Subject to the required conditions being met, a qualifying charity can increase the value of a donation by 25% - ie 25 pence for every £1 donation they receive through gift aid from an eligible UK tax payer.
There is also good news for donors, who can potentially reclaim UK income tax suffered on the cash they donate via gift aid. For HNWs, this will typically mean a refund of income tax equivalent to 25% of their donation.
3. You can also gift shares…
Gifting shares is a relatively underused and tax-effective donation method. Those who give qualifying shares to charities are exempt from capital gains tax, and could potentially claim income tax relief on the value of the gift.
The charity then has flexibility to either use cash arising from dividends if the shares are retained or from sale proceeds if the shares are sold to fund its activities.
Share giving can be particularly useful for HNW individuals, such as those who receive their bonuses in shares, or founding directors floating their company who want to unlock some of the value of their holding before the ‘lock-in’ period ends.
4. …and property and art
Tax breaks are also available to those bequeathing property or art. The gift of property has the same tax relief as a gifted share. For example, if you bought a property for £1,500,000 and it’s now worth £2,500,000, you can make a gift of £2,500,000.
At the point of giving, you can potentially get full income tax relief on the £2,500,000 whilst paying no capital gains tax on the £1,000,000 increase in value.
Like shares, the charity can choose to use cash from either renting out the property or from disposal to fund its charitable activities.
Individuals and businesses can donate different types of artworks and objects – paintings, sculpture, contemporary art, prints, books, manuscripts, and archives – under the Cultural Gifts Scheme, and claim income or capital gains tax relief.
There’s one big caveat with donating art: the artwork needs to be of ‘pre-eminent’ quality as judged by a designated panel and approved by the government.
“You may have a beautiful painting, but a gallery has to actually want it,” says Josse. “You’d do well to get somebody like Christie’s or Sotheby’s to value it” before applying to the Arts Council.
5. The regulatory climate for charity in the UK is complex
Shifting political policy and complex regulatory requirements can leave charities feeling out of their depth when it comes to their legal obligations. Yet failure to operate within the required boundaries can have serious consequences, leaving organisations open to potential legal challenges, reputational crises and for trustees and staff – the threat of fines and/or jail.
Martine Verweij, founding chief executive of the charity Kids Run Free, said that simplifying charity law would reduce the amount of time wasted by charities.
“Charities are born out of passion. They feel something is missing and they go and do something about it,” she said. But, Verweij argues, a complicated legal environment leads to charities “wasting time” that would otherwise be spent supporting beneficiaries.
For anyone looking to be involved or wanting to set up their own charity should ensure they fully understand their obligations before proceeding.
6. Donor-advised funds make giving more effective
For many new philanthropists wanting to set up their own foundation but concerned about the complex regulatory requirements, one potential option is Donor advised funds. (DAFs).
These are a vehicle administered by a third party that allows an organisation, family or individual to donate cash, shares, real estate and personal property, receive an immediate tax deduction and then recommend where to direct their gifts.
Donors can contribute to this DAF as often as they like, similar to a savings account. They allow people to ring-fence money for long- or short-term charitable giving. They come with flexible funding options and can be set up to operate anonymously. Finally, they offer the ability to track all investments within a single vehicle, even for international giving.
“The beauty of a DAF is that you get one receipt at the end of the tax year summarising whatever has come in,” says Josse. “It’s an effective way of keeping track of what you’ve donated, especially when charities today require reporting and receipts that show exactly where money has been spent. It acts like a foundation without the donor being responsible for the administrative and regulatory burden.”
7. Gift Aid may be claimed on donations from non-UK accounts
Many HNW UK tax payers with assets offshore are often unaware they can potentially claim Gift Aid and tax relief on donations from these accounts to an offshore bank account of a charity. This could be deemed a non-taxable remittance and because the entity is a UK charity, the donor may be eligible to claim gift aid on this donation. It is therefore worth checking with the charity or doing some research prior to making such donations.
It is therefore worth checking with the charity or doing some research prior to making such donations.
8. Leaving behind a legacy
HNW individuals wanting to leave behind a legacy can still contribute after their death by designating a portion of their estate to a charitable cause in their wills. Individuals such as Richard Branson and Richard Reed, the founder of Innocent Drinks, backed the Legacy10 campaign launched in 2012 to encourage people to include a gift to charity in their will.
There could also be some tax relief available as any amount left to charities will not count towards the taxable value of the deceased estate for UK inheritance purposes. In addition, if 10% or more is left to charity, the rate of UK inheritance tax is reduced from 40% to 36%.
9. Wanting to donate but don’t have funds
For many people who want to be more involved in philanthropy, cashflow can be an obstacle, which is why many individuals put off making donations till later in life. While this is a common preconception, there are ways for people to begin philanthropic giving without selling assets or drawing on their current income.
Individuals have the ability to borrow funds secured against their assets. Importantly, this allows them to retain ownership and continue to benefit from these assets, whilst freeing up cash to make donations through their lifetime.
Thank you to Anna Josse of Prism The Gift Fund for contributing to this piece.
This article is for general information purposes only and any reference to Tax should not be used or relied upon as professional advice. It is based on regulations in effect at the time of publication and no liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. It is advisable to contact a professional advisor if you need further advice or assistance as the tax implications can vary depending on an individual’s personal circumstances and may be subject to change in the future.