Charitable giving: don’t let your generosity be diminished by avoidable taxation

Most of us have a favourite charity or two, or three – ones which helped us, family or friends through a difficult situation, which could have been a lot worse without their help and support.

What better way to show gratitude than to support them financially so they can help others facing similar challenges.

The good thing is that there are ways of giving that will benefit your chosen charities – and reduce your personal tax bill.

Leaving a gift in your Will

If you want a good cause to benefit after your death, a charitable bequest in your will is the simplest and most familiar route. You can leave a specific sum, a particular asset, or a share of your residuary estate to one or more charities of your choice.

This offers a significant tax advantage: gifts to charity in a will are exempt from inheritance tax, and if you leave at least 10% of your net estate to charity, the inheritance tax rate on the remainder drops from 40% to 36%.

But be sure to get the wording right. Charities can change their names, merge or close so clear, well-drafted provisions in your will are essential to ensure your gift reaches the cause you intended.

We work with clients and their advisers to make sure the charitable provisions in their wills are robust and effective.

Making a lifetime gift to a chosen charity

If you’re keen that a charity should benefit sooner, you can make a lump sum donation. If you have a specific purpose in mind – for example, funding a new hospital ward or supporting a scholarship programme, we can help you put in place a Deed of Gift, a formal document setting out any restrictions on how the funds are to be used.

Lifetime giving can also be tax efficient. Donations to registered charities are exempt from inheritance tax, and higher or additional rate taxpayers can benefit from Gift Aid by claiming back the difference between the rate they pay and the basic rate of tax on their donation.

Working with a Community Foundation

A less well-known but highly effective option is to work with one of the many Community Foundations across the United Kingdom.

According to the organisation UK Community Foundations, the first UK and European community foundation was established in Swindon in 1975. The Thamesdown Community Trust began with a simple idea: to support local voluntary groups by bringing businesses together to pool their charitable giving, believing they could achieve far more together than alone.

50 years later, there are more than 850 community foundations spread across Europe – including 47 in the UK.

These charities act as a bridge between donors and local causes. You could set up a named fund with your local Community Foundation, specifying the types of causes or geographical areas you wish to support. The Foundation will administer the fund on your behalf, identifying suitable recipients and reporting back on the difference your money has made.

If you don’t have a single charity in mind, or if you would prefer someone with local expertise to manage the distribution of your funds, it’s a great way to make a real difference locally, or to a specific region.

Setting up your own charity

For those who want a hands-on role, establishing your own charity can be immensely rewarding, offering you preference over the charity’s objectives, governance and grant-making strategy (as long as this is in accordance with charity law of course).

But there’s going to be a lot of necessary administration to ensure it’s set up legally. A new charity will need a governing document, at least three trustees, and registration with the Charity Commission. Once established, the trustees must hold regular board meetings, administer grants, file annual returns and comply with charity law.

We encourage clients to think carefully about whether this administrative commitment is proportionate to what they are trying to achieve. In some cases, working with an existing charity or a Community Foundation may deliver the same impact with far less complexity. In others, a new charity is exactly the right vehicle, and we can guide you through the process.

Which option is right for you?

In practice, many people wanting to support charities, or serial philanthropists, use a combination of these approaches.

We strongly recommend taking advice early so you can structure your giving in a way that maximises the benefit to the causes you care about and ensures that your generosity is not diminished by avoidable tax charges or administrative difficulties.

Our team has extensive experience advising high net worth individuals and families on all aspects of charitable giving, from gifts made through a will to the establishment of new charities.

If you would like to discuss any of the options set out in this article, please do get in touch with our team.