Charities and good causes are desperately in need of support in the wake of the COVID-19 pandemic. Here we consider how to make your contribution most effective.
There has never been a more vital time to consider philanthropy. Recent data from the Charity Commission warns that 72% of charities in England and Wales saw their financial position deteriorate during the pandemic; six in 10 reported a loss of income from charitable activities, while a third struggled with reduced access to volunteers.
In a pandemic, this is a global problem, but research from the Charities Aid Foundation (CAF) suggests that good causes in the UK are suffering particularly badly. For more than a decade, the CAF World Giving Index has charted the scope and nature of giving around the world, ranking countries by the generosity they show to charities; the UK has been a consistent member of the top 10 — in 2021, it has slipped to 22nd place.
It is worth reflecting on one particular aspect of the CAF index: it defines generosity not only in terms of the money that people give to good causes, but also the extent to which they have helped a stranger or volunteered their time to an organisation. It is a reminder that philanthropy is a broad term: it comes from the Ancient Greek word for “love of humanity” and covers any act by private individuals or organisations that aims to improve the public good. We can all be philanthropists.
As wealth managers we often focus on financial gifts but giving time can be just as valuable — and rewarding.
Before you give…
A process often used by wealthy philanthropists may help you prepare — regardless of the level and nature of your giving. They are encouraged to focus on three steps:
Define — ask yourself what you want to achieve, what you are willing and able to do, what impact you hope to have, and what you would like in return.
Design — consider the options available to you, and how you might align your values and purpose with your current financial position and your future needs.
Decide — put your plans into practice and enjoy investigating the results; has your giving achieved what you hope and if not, why not? What will you do next?
If you are giving money, it is likely you will want to do so tax effectively.
Gift aid gives your donations to good causes an extra boost and can also reduce your own tax bill. The gift aid system enables registered charities and certain other organisations to claim a top-up, to the value of basic rate tax on money donated, from HM Revenue & Customs. If you donate £80, say, the charity can claim an additional £20 from HMRC.
“Gift aid gives your donations to good causes an extra boost and can also reduce your own tax bill.”
If you’re a higher-rate or additional-rate taxpayer, don’t forget to declare your charitable donations on your tax return. You can claim back the difference between the basic-rate tax benefit the charity enjoyed and your own rate of tax, normally in the form of a reduced tax bill. Donating £1,000 to charity, for example, will net the charity £1,250 including its basic-rate gift aid; higher-rate taxpayers and additional-rate taxpayers can then claim back £250 and £312.50 respectively. You could also donate this and if you gift aid it the charity gets another 20% too!
It isn’t only one-off gifts to good causes that qualify for gift aid; regular donations also qualify. That may even include membership payments for organisations such as the National Trust. Check with the charity to find out how to give in the most tax-efficient manner for both you and the organisation.
Capital gains tax (CGT) can eat up quite a chunk of any profit you make on selling shares, but charities do not have to pay this charge. Giving shares to charity can therefore be a tax-efficient way to donate to good causes. In some cases it can be more beneficial than giving cash from income or savings.
CGT is potentially payable on any investment that you hold outside of a tax-efficient wrapper such as an individual savings account or a private pension plan. Higher-rate and additional-rate taxpayers pay CGT at 20% on profits above their annual CGT allowance (£12,300 in the 2021–22 financial year). For example, if you invested £1,000 in shares 20 years ago that are today worth £20,000, selling them will net you a profit of £19,000. Some £6,700 of that would be subject to CGT, leaving you with a bill of £1,340.
To mitigate that bill, you might choose to donate some of the shares to a charity of your choice. Give away £6,700 worth of your shares, for example, and you would have no tax at all to pay. You can make such a donation by using a stock transfer form; the charity can then sell the shares with no CGT to worry about.
Depending on your circumstances, giving shares to charity may be more tax-efficient — and valuable to the good cause — than making donations in the traditional way. It is possible your CGT savings will be larger than any benefit you could get from gift aid. This can be a good way of tidying your portfolio if you have long-held shares you would not buy now, but do not want to sell because of the tax implications.
Rathbones has a nominee service that can make such a gift entirely seamless. And the transfer of a qualifying investment can be done in-house if the charity is also a Rathbones client.
Leaving money in a will
Inheritance tax (IHT) is potentially payable on estates worth more than £325,000, or £500,000 if your estate includes the value of your home. The tax is usually payable at 40%, but if your will includes gifts to charity that add up to at least 10% of the “net estate”, this reduces to 36%; the net estate is the value of your estate that is liable for inheritance tax.
The effect of this reduction in your IHT rate is that if you were planning to give between 4% and 10% of your net estate to charity anyway, your beneficiaries — and the charities — will be better off if you raise it to the full 10%.
For example, if your net estate is £200,000 and you leave 5% to charity, the charity will get £10,000; £76,000 goes to HMRC in tax (40% of the remaining £190,000) and your beneficiaries get what’s left — £114,000. Give 10% instead and the charity gets £20,000, the tax office £64,800 (36% of the remaining £180,000) and your beneficiaries get £115,200.
Should I set up my own charity?
Lots of people set up their own charities but in our experience it is worth reviewing the alternatives first. A little-known option that might be better is gifting to a community foundation.
“Starting a fund at a community foundation is... having your own charitable trust but without the hassle of administration and regulation.”
Community foundations can be a fantastic way to support charities and good causes active in a particular field or in a specific area. There are close to 50 community foundations in operation across the UK. Many work with a particular mission or objective in mind, making grants and awards to a broad range of projects in their local areas.
This is important work. While large charities operating nationally do a fantastic job, smaller organisations based more locally often struggle to raise the money they need. Building endowment funds from the donations of individuals and businesses, community foundations help to bridge this gap. And your donations to these organisations carry the same potential tax benefits as gifts to other charities.
“Community foundations know their communities and the issues affecting them intimately,” explains Andrew Beeforth, CEO of the Cumbria Community Foundation. “A fund at a community foundation enables individuals and families to give with confidence to the issues and places they care most about. Donors benefit from the ability to reach thousands of small, grassroots organisations that philanthropists would otherwise not be aware of.”
Many people find it very rewarding to get involved with local charities, or even to set up charitable trusts for themselves. But this can be time-consuming and bureaucratic. Lisa Cappleman, Head of Giving and Philanthropy at community foundation Tyne & Wear and Northumberland, says: “Starting a fund at a community foundation is quick and easy — it is like having your own charitable trust but without the hassle of administration and regulation.”
You can find out more about community foundations from UK Community Foundations, a national network of such organisations. 360 Giving is another fantastic resource: a database of who foundations support, it enables you to identify existing organisations that work with the good causes of most interest to you.
Donor advised funds
Donor advised funds (DAFs) are an increasingly popular option for philanthropists looking for more control and involvement as they make gifts to other organisations. This may be a good way to work alongside charities and beneficiaries, and to get a better understanding of the impact that giving is having.
DAFs are available from a number of providers, including the CAF Charitable Trust — a good place to start researching these structures.
These professional providers take care of the administration and regulation involved with running your fund, through an umbrella structure that covers other people’s DAFs too.
Typically, people start DAFs with a one-off contribution, which can be topped up with further donations as your circumstances allow. These contributions qualify for the same tax advantages as other types of charitable giving. We can work with your DAF provider to manage any long-term investments effectively to ensure your gift has longevity.
Once the fund is up and running, the DAF provider takes care of the day-to-day management, but you have control over how it supports good causes. The donations you make to the fund must be irrevocable, so that the fund itself becomes the owner of its assets. But you can advise the fund on the grants and awards it makes, subject to certain legal restrictions. You may want to support good causes where you are closely involved, or simply to make financial donations.
DAFs can also be set up in a way that enables you to involve your family in your charitable endeavours. This can be a good way to ensure your philanthropy continues beyond your lifetime.
If you’re keen to give both time and money to a particular cause, or group of causes, one option could be to set up a charitable trust with a one-off gift and, potentially, further contributions over time. As we have indicated, this is not something to take lightly — setting up and managing such a trust can be time-consuming and burdensome but it can be hugely rewarding.
Charitable trusts are tightly regulated entities. You will need to register with the Charity Commission, keep public records, file regular reports and comply with some demanding regulations. The trust will need to appoint trustees with fiduciary responsibility to run it, and to agree a trust deed, setting out how the organisation will be run and for what charitable purposes. You will also need legal and investment support from professional advisers.
“Don’t forget to declare your charitable donations on your tax return.”
Once the trust is up and running, the trustees will need to be prepared to spend time working towards its charitable purposes — identifying good causes to support, for example, and monitoring the impact of its work. The trustees are in full control of the trust and its assets, though they must comply with strict legal responsibilities.
You may want other family members to serve on the trustee board, including children and grandchildren, perhaps, so that the work of the trust will continue for the long term.
Finally, even if you’re not in a position to set up your own charitable trust, it is worth considering serving as a trustee at an existing organisation. Charity trustees get to work with inspiring organisations that change people’s lives for the better, but they also have an opportunity to develop their own skills, in areas such as decision-making and leadership.
Whatever you are thinking of giving, it is worth talking to your financial adviser to ensure you are maximising the tax effectiveness of the gift and that your ambitions and generosity fit with your long-term financial plan. If you would like to learn more, please contact your Rathbones adviser, or get in touch with us.