Charity and Philanthropy Update - January 2019
In this edition, we discuss options for philanthropy and where to start, the mechanics and benefits of making Gift Aid donations and some recent changes to rules affecting the administration of charities which trustees should be aware of.
- Philanthropy - how do you start?
- Gift Aid: Making charity go further
- Charity Administration – General round-up
Philanthropy is on the rise. In 2017 there was a 20 per cent increase in charitable giving by the wealthiest donors, according to research by the Charities Aid Foundation.
Why are so many high-net-worth individuals turning to philanthropy?
The primary motivation of most philanthropists is to give back to society after a fruitful career. They recognise that they have the financial resources, and often the skills and experience, to have an impact on societal problems.
The UK Government (and most other governments around the world) recognises the contribution that philanthropists make and provides generous tax reliefs to incentivise giving. This article is too short to do those tax reliefs justice, but with some planning it is usually possible to ensure an optimal tax outcome for donors.
In the UK, most people thinking about donating to charity will be aware of "gift aid", which allows a charity to reclaim the basic rate of tax on cash donations and the donor to reclaim the higher and additional rates. For additional rate taxpayers, this relief can nearly double the effective value of a donation. There is also a generous relief available on gifts of land, listed shares and shares in some investment funds, allowing the donor to offset the full value of the gifted assets for income tax purposes.
Donors also recognise the importance of philanthropy in shaping future generations of their family. This can mean preventing negative outcomes for their family; some donors give most of their wealth to charity to avoid a significant inheritance disincentivising their children from leading productive and fulfilled lives. Where a number of family generations are working together, the sense of shared vision and common purpose can be a great unifying force. Many of our clients seek to develop the next generation by involving them in the management of the family’s charitable funds, to introduce them to investment management and increase their social awareness. If a family has its own charitable foundation, the next generation can also be on the board of trustees and can gain expertise in governance, investment matters and in managing a significant organisation. Alternatively, the next generation could sit on an advisory committee so as to gain experience without taking on trustee responsbility.
There are significant non-financial benefits to philanthropy for the donor. Some philanthropists wish to "make their mark" and leave a legacy which future generations of the family can look back on proudly. With this in mind, charities are usually happy to recognise the contributions made by generous donors by naming a building or project after them, including special thanks in publicity for the charity.
When an individual has made the decision to start engaging in philanthropy, what are their options?
Many people start by making gifts to a well-known charity, perhaps to fund a particular project. This is a good option for people who want to make an impact in areas which charities are already engaged in, such as education, medical research, or arts and culture. It allows the donor to make a significant contribution, without the costs or administration of setting up their own charity.
Some donors have a longer-term vision for their philanthropy, and prefer to set up a family foundation to make grants which may be for purposes which are strictly charitable or of a wider philanthropic nature. There will be a board of trustees / directors making decisions about how to spend the foundation’s funds, and this enables the donor to influence how the funds are used.
This is often particularly important for entrepreneurs who wish to link the business they have created to the charity they are passionate about developing. Some donors give the shares in their business to the family foundation so that the business can continue in perpetuity and fund charitable giving. Donors who prefer to retain the business could instead commit to giving a proportion of the profits to charity each year.
It is worth giving some thought to how the family foundation is structured and what country it should be based in. This will depend to some extent on where the charity is intending to make grants, but also on where donors will be based, the tax consequences, and the level of regulation on charities in different jurisdictions. In many cases (for example, the UK, US and Switzerland) it often makes sense for the charity to be based in the same country as the primary donor if the donor wants to get an income tax deduction on donations.
Setting up a family foundation is not without cost or administrative burdens. UK charities are required to submit annual accounts and annual returns to the Charity Commission and comply with relevant legislation. Donors who do not wish to deal with the administrative side may prefer to set up an account with a so-called "donor advised fund" (DAF). DAFs are charities set up to facilitate philanthropic giving. The donor donates assets to their DAF account and the DAF makes grants on the donor’s behalf (provided it is comfortable the grants are for charitable purposes). DAFs are becoming increasingly popular, giving the donor a similar level of control to a family foundation without requiring the administration of running a charity.
Whilst grant-making charities can be highly effective, some philanthropists (particularly entrepreneurs) prefer more innovative ways to make an impact, even if these do not always bring the same tax benefits as traditional philanthropy. For this reason, there is a growing interest in social impact bonds, where investors fund a social impact project and receive a financial return only if there are sufficiently good outcomes. For example, a government body might commission a charity to run a project to help those with disabilities into work on a payment by results basis. The investors who funded the charity to run the project would only receive a return on their investment if the charity was successful in helping sufficient participants into work.
For the most committed philanthropists, the final option is to establish a fully operational charity or a social enterprise – a trading company established with particular social goals in mind. The organisation could carry out charitable projects itself rather than simply funding them, allowing the philanthropist to be actively engaged in the work of the organisation and leverage their business experience for social good.
While this might seem a dizzying array of options, the main point to take away is that philanthropy is not a set path. Philanthropists can shape their giving depending on their motivations, their level of engagement and their stage of life.
The Gift Aid scheme offers UK charities the opportunity to increase the value of donations made to them by UK taxpayers. For higher and additional rate taxpayers, the Gift Aid scheme also offers the opportunity to claim tax relief on their charitable donations. Yet the Institute of Fundraising has estimated that £740m in potential Gift Aid income is missed out on by charities each year and donors who are higher or additional rate tax payers also fail to claim back millions of pounds through their self-assessment tax returns (or by filing form P810 with HMRC).
As the deadline for filing 2017/18 tax returns draws near, the end of the 2018/19 tax year approaches, and given the introduction of some new rules to simplify donor benefits in April 2019, we go back to basics to look at how Gift Aid works and the practicalities of claiming it.
When a UK taxpayer donates money to a charity, the taxpayer has already paid at least 20 per cent tax on that money. Under the Gift Aid scheme, a charity is entitled to claim back from HMRC the equivalent to the basic rate of tax that has been paid on the sum donated. This means that for every £1 qualifying donation received by a charity, the charity can reclaim a further 25 pence. The value to a charity of any qualifying donation under the Gift Aid scheme is therefore increased by one-quarter. The amount of tax a charity can reclaim is calculated using the following formula:
Gift Aid reclaim = amount of gift x (20 / 80)
If the donor is a higher and / or additional rate taxpayer, he can also re-claim the uplift between the basic rate of tax and the higher or additional rate of tax that he pays calculated by reference to the total amount received by the charity (i.e. what he gave plus the basic rate tax refund).
If this still sounds rather complicated, an example might assist!
Let’s take a scenario where a donor who pays the additional rate of income tax makes a gift of £10,000 in December 2018 to the National Trust under the Gift Aid scheme.
The National Trust will be able to reclaim £2,500 from HMRC in respect of the £10,000 donation.
Amount of Gift Aid reclaim = £10,000 x (20 / 80) = £2,500
So, the total value of the donation to the National Trust = £12,500
As the additional rate of tax is 45 per cent for the tax year 2018/19, the donor will be entitled to reclaim £3,125 from HMRC against his income or capital gains tax liability for this year (or in certain cases against his liability for the previous year if the relief is claimed before the relevant tax return is submitted).
Difference between additional rate (45 per cent) and basic rate (20 per cent) tax = 25 per cent
Total donation to charity = £12,500
Tax relief due to donor = 25 per cent x £12,500
Tax relief due to donor = £3,125
In this example, the gift worth £12,500 to the National Trust, will have cost the donor £6,875.
- In order to qualify for Gift Aid the donation must be a voluntary gift of money (rather than of other assets such as shares which are entitled to a separate relief) and no significant benefit may be received in association with the donation.
- You must have paid, or have to pay, an amount of UK income tax and / or capital gains tax in the same year that the donation was made, that is at least equal to the amount of tax that the charity will be claiming back on your donation. If you make a number of Gift Aid donations in a year to several different charities, you must have paid, or have to pay, a sufficient amount of UK tax to cover the total amount of tax that the charities will be claiming back on these donations.
- You must make a Gift Aid declaration in respect of your charitable donations in order to claim Gift Aid and every tax repayment claim from a charity must be supported by a declaration. The declaration can be made in writing, over the phone (provided the call is recorded or a written confirmation is sent subsequently) or online. It must include some basic details including:
- your full name,
- home address,
- something that identifies the charity to which you are giving,
- a description of the gift to which the declaration relates,
- whether the declaration covers only the present donation or either or both past and future donations, and
- an acknowledgement that you are aware of the requirement to have paid enough tax.
- If you do not pay at least as much income tax and / or capital gains tax for the year of donation as the amount that will be reclaimed by the charity and by any other charity you donate to in that tax year, you will be responsible for paying the difference.
- In your self-assessment tax return, you usually only report items from the tax year in question (e.g. for the return made by 31 January 2019, you report things for the year 2017/18). However, where Gift Aid is concerned, you can also claim tax relief on donations you make in the current tax year up to the date you send your return. So, in practice, in your tax return for the tax year 2017/18, you can also claim Gift Aid for donations that you make in the period from 6 April 2018 to 31 January 2019 (if the return is submitted on the last possible date). To do this you must make an election to have any higher or additional rate tax relief due carried back to the previous year of assessment.
- If you do not file a self assessment tax return, you can reclaim Gift Aid by filing form P810 with the Revenue.
- If you are a remittance basis user, it is possible to make a gift which qualifies for Gift Aid (provided you have paid sufficient tax in the UK) without triggering a remittance tax charge. This is done by making the gift to a non-UK bank account of the relevant UK charity. The money can then be brought into the UK, or otherwise used by the charity, without there being a remittance to you.
The new rules: Gift Aid benefits
From 6 April 2019, new legislation will come into force to simplify the permitted benefits donors may receive in return for a donation under the Gift Aid Rules. These benefits might include the right to receive certain magazines, reduced price tickets and / or items such as pens. From 6 April 2019:
- the benefit threshold for the first £100 of a donation will remain at 25 per cent of the donation; and
- for donations above £100, the donor can receive a benefit of £25 plus an additional benefit of up to 5 per cent of the additional amount donated above £100.
The total value of a benefit that a donor is able to receive remains at £2,500.
Given the minimal administrative effort involved in making Gift Aid donations, there is no reason not to make full use of the process if you and the charity qualify and you should make a mental note to volunteer for Gift Aid at every opportunity. You should also keep a record and evidence of Gift Aid donations that you make in any year with your tax papers so that you will be able to claim higher-rate or additional rate relief on your donations.
Automatic disqualification rules for charity trustees
New rules on trustee disqualification came into force on 1 August 2018. The effect of the new rules is to extend the criteria for disqualification from charity trusteeship and their scope to include senior management positions.
The new reasons for disqualification now include being named under anti-terrorism legislation, being in contempt of court or being on the sex offenders register.
In accordance with the Charity Commission’s guidance, charities should ask their charity trustees and relevant senior managers to confirm that they are not disqualified under the new rules. They have provided the sample declarations below for this purpose:
- Senior management: Automatic disqualification declaration
- Existing trustee: Automatic disqualification declaration
Charities must also update the pre-appointment checks they make on prospective charity trustees and relevant senior managers. New charity trustees must sign a new form of the trustee declaration. New trustees: Trustee declaration
A senior manager who is disqualified under the new rules must resign and a disqualified charity trustee must cease acting in that role. It is possible, however, to make an online application to the Charity Commission to waive the disqualification.
Budget 2018 and changes to Gift Aid benefit rules
October’s budget contained a number of small but nevertheless positive developments for charities and donors designed to reduce the administrative burden on the sector. These are set out in our note here.
The budget also confirmed that the changes to the rules on permitted benefits under the Gift Aid rules (announced in December 2017) would come into effect on 6 April 2019. For an individual's donation to charity (or to a Community Amateur Sports Club) to qualify for Gift Aid, the donor must not receive significant benefits from the charity in return for his donation. Details of the new rules are set out entitled "Gift Aid: Making charity go further" above.
Charity Commission annual return 2018
The Charity Commission has introduced a tailored annual return for charities for financial years ending on or after 1 January 2018. It now includes questions on:
- the use of professional fundraisers;
- income from the Government;
- income from outside the UK (from non-UK governments, non-profit organisations and non-resident donors);
- employee benefits;
- payments to charity trustees;
- spending in countries outside England and Wales;
- trading subsidiaries; and
Some of the questions are designed to collect information that will allow the Charity Commission to better target its advice and guidance for charities (because, for example, they are particularly reliant on a single source of funding) and others are included so as to enable the Charity Commission to take a risk based approach to monitoring overseas income and expenditure.
The questions on overseas income and expenditure are voluntary for 2018 so as to allow charities to put systems in place to collect the required information. They will be mandatory from 2019 onwards.
Charities should ensure that they have systems in place that will allow them to capture the information required. Also, as the information provided to the Commission will highlight some areas of compliance and governance which have not previously been visible, the new regulations provide a useful opportunity to review practice and procedures so as to ensure that these are robust and fit for purpose.
Extension of the Trusts Registration Service in 2020
In 2017, HMRC launched the Trust Registration Service as a result of the record keeping and disclosure obligations introduced by the UK’s implementation of the EU Fourth Money Laundering Directive.
The main impact on UK charitable trusts has been the need to maintain written records relating to the trust’s beneficial owners. These records must be shared on request from law enforcement agencies and other bodies which have anti-money laundering client due diligence obligations (such as banks and investment managers).
Trustees of charitable trusts which have incurred a liability to pay any of the relevant UK taxes (being income tax, capital gains tax, inheritance tax, stamp duty land tax, stamp duty reserve tax or land and buildings transaction tax (Scotland)) will also have had to register with the Trusts Registration Service (TRS) and report certain information. Of course, given that most UK charities are exempt from UK taxes, they will not have had to register with the TRS so far.
However, the "tax consequence test" was removed by the Fifth Money Laundering Directive (5MLD) which was passed by the EU on 9 July 2018, bringing many more trusts, including charitable trusts, within the potential scope of this reporting requirement for the first time. A particular concern for charities is whether the registration requirement will apply to restricted funds (or "special trusts") held by a charity.
The UK has until 20 March 2020 to implement the enhanced trust registration requirements of 5MLD and we expect the UK Government (which has expressed its commitment to complying with the 5MLD notwithstanding Brexit) to consult on the changes in early 2019. We will produce a further update once the consultation has been published.