Getting philanthropy right: the basics of giving well
Planned philanthropy usually rests on a sound financial structure, giving you the greatest freedom to support your cause – including making use of highly valuable tax breaks.
Targeted giving: developing the programme that can deliver maximum benefits to your chosen causes can take time – and may require advice
While many clients have been engaging in charitable giving for years, or even generations, we are often asked by those who are not currently giving to help them get started.
Before you make significant donations to charity there are a number of practical issues to consider and resolve.
Philanthropy: finding the right vehicle
If you are planning to make small annual donations to charities, then there is no need for the additional complexity that a family charitable foundation or alternative structure brings. However, if you are allocating a reasonable proportion of your wealth to charity, as many of our clients are, it is advisable to set up a "giving vehicle".
The "donor-advised fund"
In the UK there are a number of options that can be considered, but the main options involve a charity established by trust or corporation or outsourcing this process through a "donor advised fund".
Establishing your own charity should not be undertaken lightly. While it will give you – in the role of trustees or directors – the maximum control over grants and investment, it does bring with it public scrutiny and the need to comply with legal, tax and regulatory requirements.
Donor advised funds can work well as a standalone vehicle, or in conjunction with a family foundation. A donor advised fund is essentially a charity investment account, allowing donors to make contributions, enjoy tax benefits and recommend grants from the fund over time. A donor advised fund provides all the tax benefits that would arise if you set up your own charity. The significant advantage, however, is that you are effectively outsourcing the legal and regulatory compliance to the fund administrator as trustee.
There are a number of donor advised funds available. We can help by selecting the appropriate one to suit your needs, including taking into account your tax status. Options are also available for those clients who have US tax considerations.
Should a donor advised fund not be suitable, we can support you to obtain the required legal and accounting advice to establish your own charitable vehicle.
Funding your charitable cause
The UK offers a number of valuable tax reliefs for those who wish to give money to charity. These reliefs have the useful effect of enabling you to be even more generous with your assets, giving more to the causes you care about.
Income tax relief for charitable giving
You receive income tax relief on cash and certain other assets that you gift to charity. The way this relief is applied, and the amount that you receive, depends on the form in which you give.
Where the gift is cash the charity will receive gift aid based on a 20% tax rate. However, higher rate and additional taxpayers pay tax at a rate of 40% or 45%. These taxpayers can reclaim the difference between the basic rate of tax claimed by the charity and the higher rate of tax they actually pay.
If you give assets – rather than cash – you will receive the income tax relief in full. However, this can be a complex area, especially given the differing tax rates between dividend and income tax and some of the finer points of gift aid rules. Advice in this area can be valuable. In many cases we recommend planning gifts over a number of tax years.
Capital gains tax breaks for charitable donations
The transfer of certain assets, such as public and private shares, land, art and property, to a charity, does not result in a disposal for capital gains tax purposes – and therefore there is no capital gains tax to pay. Many clients hold assets purchased in the past which have amassed significant capital gains. If sold, these assets would be subject to tax.
However, if they are transferred to a charitable vehicle, they can be sold without any tax liability arising for either the donor or charity.
This can significantly enhance the value of donations to charity and is the most common method of funding a charitable structure such as a donor advised fund.
Philanthropy and inheritance tax breaks
This is another arena in which planned giving to your chosen cause results in tax breaks. The gifts bequeathed to charity in your will do not attract inheritance tax. In addition, leaving a legacy of a minimum of 10% of your net estate assets to charity, via your will, reduces the rate of inheritance tax from 40% to 36%. This can significantly lower the cost of a legacy donation to charity, as the below example demonstrates.
In this case, a legacy of £100,000 costs the estate of the donor just £24,000.
|Legacy as % of taxable estate||0%||10%|
|Net estate assets||£1,000,000||£900,000|
|Estate after tax and legacy||£600,000||£576,000|
A number of clients will revise their will to make a legacy donation to the charity or donor advised fund they establish during their lifetime.
As with many aspects of tax, the devil is in the detail. The best approach to funding your cause is likely to depend on your wider investment holdings and financial objectives. Optimising tax reliefs should enable you to give significantly more, but should not be isolated from your other financial planning.
Philanthropy: investing for the longer-term – and for impact
Once you have funded your vehicle, the assets will normally be invested to generate the long-term income and capital spending requirements of your charitable projects. At least, that is the traditional model.
Today, however, a growing number of clients are asking us to design and implement a responsible and sustainable investment policy for their charity, and manage the assets to help further their mission. They no longer wish to view how investment returns are generated as a process which is separate from their charitable giving. As the largest charity investment manager in the UK, and with specialists in sustainable and impact investment, this is an area where Cazenove Capital can provide valuable advice.
Head of Impact and Philanthropy
Lyn is a Wealth Planning Director and provides investment structuring, retirement and estate planning advice. Lyn has specific expertise in Philanthropy and Social Investment and is vice chair of the ethical asset class committee. She is a Chartered Financial Planner and a Chartered Wealth Manager holding the CISI Masters in Wealth Management qualification.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
All data contained within this document is sourced from Cazenove Capital unless otherwise stated.