Introduction
Options for giving
Tax
The UK government is increasing its attempts to encourage the public to become more philanthropic through its 'Big Society' initiative. There are also growing calls around the world for the wealthy to contribute more to society, as well as growing enthusiasm among high-net-worth individuals for philanthropy, partly inspired by the recent efforts of Warren Buffett and Bill Gates. Taking account of this charitable trend, this update considers ways to assist giving to good causes.
As well as explaining the options, advisers should invite their clients to consider what other calls they have on their wealth and, accordingly, how much they may have available for good causes. Furthermore, since each option has distinct legal and financial implications, wealthy individuals should seek specialist advice to avoid unforeseen consequences that may hamper their good intentions. This is particularly an issue in relation to tax.
Options for giving
Lifetime gifts to charity
Wealthy individuals can give outright gifts of cash and assets (eg, shares or land) to existing charities. Such gifts are free of inheritance tax. However, in the case of significant gifts, donors may wish to ensure that the assets or cash will be used according to their wishes by attaching conditions to the gift - for example, they may require an annual review or ask for a separate fund to be established within the charity. Donors can also give to charity through payroll giving or gift aid.
Giving in a will
Donors can leave cash or assets to existing charities in their wills. Such gifts can be in the form of a specific legacy (eg, leaving a specified sum to a charity). Alternatively, the donor may make a gift of residue (eg, with terms to the effect of 'the residue of his or her estate to my daughter but, in the event that she predeceases me, to Charity A'). If such a legacy is made to a UK charity, the gift is tax free.
A donor who has already made a will may be able to amend his or her existing will to allow a charity to benefit by signing a codicil. This may be cheaper than preparing a new will.
Establishing a charity
Some donors may wish to establish their own UK charity if they are considering significant donations and wish to remain involved with their chosen good cause. In this situation, such a charity must be registered with the Charity Commission. Significant work by the donor and his or her advisers would be needed to achieve the client's aims.
A charity may be created either during the individual's lifetime or by will. However, the former is more common and is more likely to achieve the donor's aims, since careful consideration will need to be given to the correct structure, choice of trustees, administration and compliance and the level of involvement that the donor and his or her heirs wish to maintain.
Philanthropy
For wealthy clients who want to become more involved in the charitable work that they are helping to fund, creating a philanthropic strategy may be a good option. Although this is a specialised area, the key stages in providing advice are:
- determining what the individual wants to achieve;
- creating a charitable giving strategy that takes account of:
- the individual's goals and objectives;
- the focus of his or her giving;
- the types of recipient that he or she wants to support; and
- the type of support that he or she wants to give;
- advising the individual on how to give tax efficiently;
- identifying and evaluating potential recipients (ie, looking at what the recipient does, how effective it is and how the individual's support can make a difference); and
- assessing and understanding the results of the individual's giving, since this will affect his or her future giving.
Tax
There are a number of existing UK tax reliefs to encourage charitable giving:
- transfers of value (relief from inheritance tax);
- gift aid (relief from income tax or corporation tax);
- payroll deduction (relief from income tax);
- disposals by way of gift (relief from capital gains tax or corporation tax on the capital gain);
- gifts of qualifying investments and real property (relief from income tax or corporation tax);
- community investment tax relief; and
- philanthropic funds, charitable vehicles and donor-advised funds.
In addition, the government has proposed some significant tax changes to encourage giving to good causes.
Inheritance tax
The government has proposed changes to encourage individuals to leave more of their estates to charity in its Giving White Paper. The proposed changes will apply to those who leave at least 10% of their estates to charity (after deducting inheritance tax reliefs, exemptions and the nil-rate band). A reduced inheritance tax rate of 36% (instead of 40%) will apply to these estates. Although gifts to charities in a will are already exempt from inheritance tax, the effect of the proposed changes on an estate that qualifies for the reduced inheritance tax rate will be to reduce the total inheritance tax payable on the estate. The more an individual gives to charity, the lower the inheritance tax will be. Non-charitable beneficiaries will benefit because this will reduce the cost that they bear in respect of the charitable legacies.
Consultations on the proposals closed on August 31 2011 and Her Majesty's Revenue and Customs (HMRC) published a summary of responses and draft legislation on December 6 2011. The original proposals have been refined in a number of ways:
- All assets within an estate will be eligible for the reduced inheritance tax rate if the charitable legacy from that estate, or part of that estate, passes the 10% test.
- For the purposes of this measure, the deceased's estate will be divided into three components. Broadly speaking, these are:
- assets that would pass to someone under a will or intestacy (ie, the free estate);
- assets that would pass automatically to a surviving joint owner (ie, survivorship property); and
- assets in a trust (ie, settled property).
- The 10% test apply to each component separately and the reduced inheritance tax rate will be applied to those components that pass the test, unless an election is made to opt out.
- Where a charitable legacy exceeds the 10% threshold for its own component, it will be possible to aggregate other components by election and to apply the 10% test and reduced rate to the combined components.
The changes are expected to be implemented in the Finance Bill 2012, and HMRC intends that the reduced rate will apply to the estates of those who die on or after April 6 2012. However, wealthy individuals who are updating their wills or drafting new wills and who want to give some of their estate to charity may wish to consider including provisions to try to take advantage of the proposed changes, although they should review the will again once the legislation has been enacted.
Works of art and objects of national importance
On November 29 2011 the chancellor stated that the government will legislate to enable individuals to receive a reduction in their income tax or capital gains tax liabilities, and companies to receive a reduction in their corporation tax liabilities, in return for donating works of art and objects of national importance to the state. The total tax reductions under the scheme, and taxes offset under the existing inheritance tax Acceptance in Lieu scheme, will be subject to an increased annual limit of £30 million a year overall (instead of £20 million). These changes are expected to take effect from April 6 2012.
Comment
The tax reliefs and proposed tax reliefs are complex. Individuals should seek specialist advice to ensure that any gifts they make to good causes qualify for any relief available, thereby ensuring that their chosen good cause gets the benefit, rather than HMRC.
For further information on this topic please contact James Whiley at Lawrence Graham LLP by telephone (+44 20 7379 0000), fax (+44 20 7379 6854) or email ([email protected]).