Lifetime legacies, taking the form of the charitable remainder trust (‘CRT') and its mirror image, the charitable lead trust (‘CLT'), have long featured in the toolkit of philanthropic tax-planners in the USA. Essentially, the CRT provides an income stream to the donor but at the same time identifies a charity as the capital beneficiary (of the asset generating income stream for the donor during the donor's lifetime) upon the death of the donor. Conversely, the CLT allocates the income generated by the relevant asset or assets to the chosen charity during the donor's lifetime, the asset or assets passing to nominated, non-exempt beneficiaries on the donor's death.
Lifetime legacies were developed by fund-raisers in California, working for universities. Eventually the IRS accepted their value as a fund-raising tool for the development of endowments and capital projects, scholarships etc. and, subject to their being regulated, accepted the concept. Indeed, forms are available for would-be donors on the IRS website. Often donors are provided with a fixed return in the case of a CRT, with the result that, if the fixed return is exceeded, the charity may keep the surplus income generated.
With the election of the Coalition Government in the UK in May 2010, it is generally considered that the prospects for the introduction of a form of lifetime legacy in the UK have never been brighter, not least because the government is looking for ways to compensate for the cuts and tax increases, which will inevitably have a significant, negative impact on the charitable sector. Of the two, the CRT is felt to be the most likely to appeal to the Treasury and HMRC. In the USA the creation of the CRT is exempt from the equivalents of inheritance tax and capital gains tax; the capital value of the asset gifted (discounted to the extent of the income reservation in favour of the donor) can be offset against the income of the donor for income tax purposes but otherwise the donor pays income tax on the income they receive. Due to the fact that any capital gains pass to the recipient charity, any realized gains are exempt from capital gains tax.
The basic structure of the CRT is well capable of being imported to the UK since it is essentially a form of interest in possession settlement or life interest trust. The key to its introduction is the lifting of the gifts with reservation rules in such a way as to confer the same exemptions and reliefs in the UK as are available for these vehicles in the USA. One of the main obstacles comprises HMRC's concerns about abuse. In addition, there is concern about valuations of assets.
In the context of the Coalition Government's Big Society agenda, 300 charities in the UK were canvassed about the introduction of the CRT. Two thirds of the charities canvassed believed that they would-be worse off in twelve months' time as a result of cuts and tax increases, notably increases in VAT and there was general enthusiasm for the introduction of the CRT.
Parallel surveys of would-be donors/philanthropists revealed a universal interest in CRTs and there is general consensus that the CRT would provide a credible and meaningful mechanism for planned giving in the UK as part of the Big Society programme. Gift Aid on its own will not be sufficient but CRTs should provide a complimentary tool-kit for giving. If HMRC is to be convinced, it is reckoned that people of influence and key decision-makers must be enlisted to the cause as their support could make all the difference.
Currently the European Association for Philanthropy and Giving, of which I am currently the Chair, the Charity Tax Group and the Charities Aid Foundation are working together in order to promote the introduction of the CRT in the UK as early as possible.