In this article, Tracy Sian Browne and James von Simson, both Investment Directors from our London office, answer some of your questions about charitable giving and philanthropy. James is a Trust and Estate Practitioner (TEP), accredited by the Society of Trust and Estate Practitioners (STEP) and Tracy has more than 25 years of experience advising clients.
What is the best way to make a charitable gift?
James von Simson: Charitable giving can be an intensely personal act and tax doesn’t normally enter into decision making here. However, the value of donations can be increased four-fold through tax planning. The most common type of giving is one-off donations of cash, which can be eligible for Gift Aid, whereby charities can claim a further 25% of the value of the gift from the government. This is because it is grossed up to the basic tax rate as if the gift was made out of pre-tax income. An added bonus for higher and additional-rate taxpayers is they can claim the difference between their marginal rate and the basic rate back on their tax return. This means that a gift of £100 by an additional-rate taxpayer is worth £125 to the charity, but only costs the giver £68.75 – almost doubling the value of the gift.
Tracy Sian Browne: You can also make one-off gifts of shares, property or land to charities. Gifts of assets benefit from a rebasing for Capital Gains Tax purposes and therefore, gifts which have seen an appreciation in value since acquisition can be an important financial planning tool to maximise the assistance to your chosen charity. Many UK museums and galleries also benefit from schemes that accept assets of historic, artistic or scientific interest to settle Income and Capital Gains (Cultural Gifts Scheme) or Inheritance (Acceptance in Lieu Scheme) Tax bills.
James: Ongoing gifts to charity are generally given via standing orders, which are also eligible for Gift Aid. However, payroll giving, known as ‘Give as you Earn’, where a portion of your salary is donated to a nominated set of charities, is an increasingly important part of charities’ regular income. As this is deducted before tax, it is one of the simplest ways for higher and additional-rate taxpayers to maximise their gifts and it reduces the administration burden on charities as they don’t have to claim Gift Aid on each donation.
Tracy: Finally there is legacy giving. While it is a core part of estate planning in the United States, it is less common in the UK, with only around 5% of charities’ annual income derived from legacies**. We are surprised at how often we see Wills that contain no gifts to charity as this means they miss out on one of the basic estate planning tools known as the ‘Legacy 10’. If you leave at least 10% of your net estate to charity, your Inheritance Tax bill is reduced from 40% to 36%. For example, if your net estate is worth £1 million, £400,000 would be payable in Inheritance Tax and your beneficiaries would receive the remaining £600,000. On the other hand, if you gave £100,000 (10%) of your net estate to charity, £324,000 would be payable in Inheritance Tax (36% of £900,000) and your beneficiaries would receive £576,000. This means that in effect, a £100,000 gift to charity ‘costs’ your beneficiaries £24,000 — a more than four-fold increase***.
What is the difference between charity and philanthropy?
Tracy: While both can have a significant emotional element, charity is often an immediate response to an acute issue or disaster, whereas philanthropy can be seen as more strategic. It is often said charity seeks to relieve the pain whereas philanthropy seeks to get to the root cause. Philanthropy isn’t just about giving money, it’s also about the giving of time and expertise, and connecting people to help a cause. While there is a difference, the terms 'charity' and 'philanthropy' are frequently used interchangeably and the distinction can be blurred — after all, is your regular support of research to cure cancer philanthropy or charity?
James: A desire to ‘do good’ is a common aspiration of wealthy families, but philanthropic strategies need careful consideration, as there is no one-size-fits-all formula for giving. Families need to decide which approach best aligns with their aims. When thinking of the big systemic issues, interconnectivity problems can make it hard to even know where to start. For example, it is easy to dig a well to provide water, but who will maintain it and how do you decide who has access to it?
What are the different ways people can structure and plan their philanthropic giving?
Tracy: It has been argued that anyone who dies with a taxable estate is a philanthropist, as the beneficiary is the rest of the nation. Some people do not want this automatic philanthropy to be applied on their death and instead want to exercise some control over where their money goes. Deciding on an active plan during your lifetime allows you to do this. A starting point would be to establish a budget for annual gifts and for families to consider and agree on what their core values are and how this might be built into a legacy. Families can use philanthropic giving as a tool to teach the power and value of money to the next generation. Some families set research tasks for the younger generations and allow children to pitch their favourite charity for that month’s donation.
James: A family who decide to embark on a philanthropic journey will find the most meaning if they are thoughtful about their goals, are open to different, and perhaps creative, solutions and seek to learn from others.
Tracy: When properly considered, the best way to encourage a culture of generosity in families is for individuals to practice it regularly and in ways that can provide immediate feedback. Chuck Feeney, the US former-billionaire and pioneer of duty free shopping, used to say the joy of giving should not be postponed. Only recently he achieved his aim of giving away all of his US$8 billion fortune during his lifetime with his foundation finally running out of money after 38 years****.
James: While some people might want the prestige of a charitable trust or foundation bearing their family name, for most the use of a simple Donor Advised Fund confers most of the benefits without the cost. A Donor Advised Fund is a fund, or group of sub-funds, that is administered by a charity. Instead of donating to a specific charity, donors can instead regularly donate to their Donor Advised Fund, which is eligible for Gift Aid and also the immediate Income Tax benefit, and lets the funds build up before transferring it to a charity. The use of a Donor Advised Fund not only allows people to make a multi-year commitment to their favourite charities but it also allows time for an individual or family to develop a philanthropic vision.
Speak to Tilney
Tilney’s experts help many families establish and make the most of their charitable and philanthropic giving. If you’d like to know more about how we can help you, call us on 020 7189 2400 or book a free initial consultation online.
* Source: Institute of Fundraising, 2020
** Source: Remember a Charity in Your Will, 2019
*** Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief (if applicable) will depend upon individual circumstances and may be subject to change in the future
**** Source: The Atlantic Philanthropies, 2020
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This article was previously published on Tilney prior to the launch of Evelyn Partners.