Make your charity donations count by considering philanthropy services and giving the tax-efficient way, writes Sam Barrett.
Whether you make a regular donation to charity or leave a legacy in your will, using your wealth to support good causes can deliver much more than a financial return. Adopting some of the principles of philanthropy can increase the benefits of giving, both for you and for your chosen charities.
Supporting charities is certainly popular in the UK. According to the Charities Aid Foundation (CAF) annual report, UK Giving 2018, individuals gave £10.3 billion in 2017, up from £9.7 billion the previous year.
Emma Turner, head of client philanthropy at Barclays Private Bank, says it’s a topic that’s benefiting from more attention. “There’s a lot of hesitancy around discussing money in the UK but, as more people talk about philanthropy, it will encourage others to support charities,” she says.
Philanthropy services If you’re considering making a substantial donation, a philanthropy service can help. As well as the services offered by private banks and wealth managers, CAF is also active in this market.
Joanna Walker, head of private clients at CAF, explains: “We’ll work closely with our donors to help them identify the charities they want to support and structure their giving. It’s about helping them get the most out of giving.”
Often these donations are directed through a donor-advised fund, which enables an individual to give anonymously if they want, but also offers tax advantages. As a donation can be made into the fund before you’ve decided which causes you’d like to support, it can support tax-efficient estate planning.
Venture philanthropy is also becoming more commonplace. This draws on some of the principles of venture capital, according to Priscilla Boiardi, knowledge centre and policy director at the European Venture Philanthropy Association. “It’s based around three core practices: tailored financing, organisational support and impact management,” she explains. “It’s about getting much more involved in a social venture, often giving time and expertise to help it achieve its objectives.”
Many of the philanthropy services can help facilitate such involvement too. For example, Walker says she’s seen more people wanting to use their skills and time to benefit a charity. “Engagement can be as important as the financial gift,” she explains. “Being able to get involved with the charity, whether on the board or volunteering in another way, can make it more meaningful.”
Whether you want to get involved or prefer a more hands-off approach, the personal nature of philanthropy services does mean you’ll need to be making a significant donation if you want to make use of them. For instance, with the private banks you’ll usually need to be a client, while you should be giving away at least £25,000 to access CAF’s philanthropy advice service.
While the sums involved mean philanthropy services definitely won’t be for everyone, it is possible to adopt some of their principles in your own giving strategy. In particular, Turner recommends adopting a ‘smart giving’ approach to charity donations. “Don’t be afraid to ask questions before you give money to charity,” she explains. “There are more than 160,000 charities in the UK, so it’s really important to find the one or ones that are aligned with your interests.”
The extent of your research is likely to depend on the size of your donation, but she recommends finding out more about how your money will be used; how the charity tests and reports its impact; and how well it is run. For example, when it comes to information about the impact the charity achieves, a newsletter covering the charity’s broad impact might be fine for a donation of less than £500, but if you give more than £1,000 you should expect a report outlining how your donation is used.
It’s also possible to give your time and expertise to charities in line with the approach taken by venture philanthropists. As well as the more traditional volunteering model, with opportunities accessed through websites such as Do It (do-it. org) and Reach Volunteering (reachvolunteering.org.uk), charities are also available specifically to match individuals with business expertise with other charitable organisations seeking support.
As an example, the charity Pilotlight places business professionals on 10- to 12-month mentoring projects with charities and social enterprises that set out to help disadvantaged people.
“We’ll place small groups of professionals with an organisation, helping it with anything from putting together a business plan or relocating, to governance and funding,” explains Lucy Avery, marketing communications manager at Pilotlight. “As well as helping the charity, our pilotlighters benefit from the experience too.”
Fine-tuning the support you give to charities is important, but it’s also prudent to know how to give tax-efficiently, especially as this can benefit you as well as those receiving the donation. “The government wants to encourage people to give to charity, so it offers a number of tax breaks,” says James Hender, head of private wealth at Saffery Champness.
Gift Aid declaration
Gift Aid is the first consideration. As long as you fill out a Gift Aid declaration for each charity you would like to give money to, it will be able to claim back tax relief at 20% on any donations you make. This effectively boosts every £80 you give to £100.
If you’re a higher or additional rate taxpayer, you can claim back the difference through your self-assessment form. On the £80 example, this will give you a further £20 of tax relief, or £25 if you’re an additional rate taxpayer.
There is an important condition. For the charity to be able to claim back Gift Aid, you need to have paid sufficient tax to cover it. If you haven’t, you could find yourself having to pay it yourself.
It’s also possible to donate other assets such as listed shares, land and buildings to charities and receive tax relief. “If you give £100 of Vodafone shares to charity, you can knock that £100 off your taxable income for the year,” explains Hender. “On top of that there’s no capital gains tax to pay so, if you’re facing a liability, it may be better to give this type of asset than cash.”
Another tax benefit available to investors looking to support charitable causes is the social investment tax relief scheme. These are set up by charities and social enterprises and offer 30% income tax relief upfront on investments of up to £1 million, providing the tax has been paid and the investment is held for at least three years. “It’s taken time for organisations to work out how to structure these investments to qualify for this relief, but we’re starting to see some being put together,” adds Hender.
Winning ways with charitable legacies
Leaving money to charity in a will is a popular option, with figures from HM Revenue & Customs showing that £3 billion was left to charities and registered clubs in the 2015-16 tax year, more than double the £1.45 billion left in 2010-11.
Part of its popularity is down to the tax breaks. Any gifts to charities are free of inheritance tax (IHT); moreover, providing you leave them at least 10% of your net estate, your overall IHT rate will be cut from 40% to 36%. As an example, say your estate is worth £500,000. Deduct the nil rate band (£325,000) to give a net estate of £175,000. If you then leave 10% of this – £17,500 – to charity, the net estate would be £157,500, giving an IHT bill of £56,700 and leaving £100,800 to your beneficiaries. Without the charity donation, the IHT bill would be £70,000, leaving your beneficiaries £105,000.
If you are planning to leave something to charity, Ian Dyall, head of estate planning at Tilney, says it can be worth making sure you qualify for this reduction. “We’ve had situations where charity donations made up 8% of the net estate so we did a deed of variation to increase this to 10%,” he explains. “The charity benefited with a higher donation, which also triggered the cut in the IHT rate, so the beneficiaries received more too.”
But, although the ability to secure a lower IHT rate has encouraged more people to leave a legacy in their will, Dyall says that in some circumstances it can be worth bringing these donations forward. “You’ll lose the main residence nil rate band (£125,000 in 2018-19) at the rate of £1 for every £2 you have in your estate over £2 million. Unfortunately, for this calculation, HMRC includes items such as gifts to charity and assets that qualify for business property relief, so it’s much easier to get caught. This can make it worth making those donations in your lifetime.”