Philanthropy: Planning to Make a Difference

In this issue, Pippa Oldfield, a Financial Planning Analyst with Leeds based financial planning firm Manse Capital looks at the opportunities available for philanthropic giving.

Philanthropy: Planning to Make a Difference

One of the great benefits of building wealth is to be able to use it to promote the greater good. The rush of day to day life can be all consuming, often leaving us solely focused on ourselves. Stopping to think about those in the community who are vulnerable, supporting worthwhile causes, can be a valuable and meaningful experience for families.

With a charity sector worth £11bn, bigger than energy and agriculture combined, the UK has a strong philanthropic culture. In fact we are the 5th most prolific charitable donor behind the USA, Ireland, New Zealand and Australia.

Some of our clients are in the fortunate position of having more money than they need. Once your financial plan has been created, with sufficient resources to meet your lifetime goals, perhaps setting aside funds for eventualities such as long term care or passing wealth to the next generation, you may have spare funds. Some clients would like to see surplus capital given back to the community to support causes they feel passionate about.

While many people’s approach to philanthropy is to leave a bequest in their Will to their favourite charity, giving while living is a much more rewarding experience on every level. Studies have indeed shown that donors gain huge personal satisfaction and benefit from philanthropy. Unfortunately, many people who have well thought out and implemented financial plans, still think that developing a structured and long term philanthropic approach is highly complex or difficult. In fact, it is a lot easier than most people think, and aside from personal satisfaction, donating comes with significant tax breaks.

There are three main vehicles for lifetime charitable giving.

The method of choice depends upon the donor’s resources, time, the level of control and involvement they want. Some donors use a combination of all three.

  • Direct Gifting

Most people are familiar with Giftaid. Donations of any amount can be made online via websites such as justgiving.com or directly. The charity claims back the basic rate tax you’ve paid (20%) on the gift you make. If you are a higher or additional rate tax payer, you can reclaim further tax of up to 25% through your tax return. So for an additional rate tax payer, a cash donation of £10,000 provides the charity with £12,500, for a net cost of £6,875 to the donor.

Perhaps you have a few shares you don’t particularly want or need. A gift of shares is a vastly underused and underestimated benefit, with a break on Capital Gains Tax in addition to full Income Tax relief, so long as the shares are listed on a stock exchange. A donation of appreciated shares of £10,000 provides the charity with £10,000, at a net cost of £3,260 for the Additional Rate tax payer. (£4,500 additional rate tax relief reclaimed via your tax return, plus £2,240 CGT relief, assuming an £8,000 gain and CGT at the higher rate of 28%).

  • Donor Advised Funds (DAFs)

 If you want an element of control, you may wish to consider Donor Advised Funds. Most relevant to larger donations of circa £25,000 plus, a DAF is a fund held within a charitable organisation such as NPT-UK. An easy way to think about a DAF is like a charitable savings account – a donor contributes to the fund as frequently as they like and then recommends grants to their favourite charity when they are ready. It is similar to a personal foundation (below) but without the administrative burden or cost. The tax breaks applicable to giftaid also apply, so long as you have a large enough tax liability to reclaim.

  •  Charitable Trusts

If it is total control and involvement you want, then you may want to consider setting up your own charitable trust. Like a charity, it involves setting up a board of trustees, legal advice, reporting to the charity commission. Given the administrative commitment and additional costs, a trust is more suited to those able to commit large sums. The trust can be named and personalised to any cause you may feel passionate about, it comes with public recognition and trust, which can assist with fundraising.

 Leaving a charitable legacy in your Will

If you need all your resources to meet your living costs and other lifetime objectives, but still want to make a difference, why not include a charitable legacy in your will? The gift itself is exempt from Inheritance tax, and it reduces the size of your estate liable to IHT. Furthermore, donations of more than 10% of the net value of your estate (after debts, liabilities and deduction of the IHT nil rate band), result in a reduction in the rate of IHT paid on the whole estate from 40% down to 36%. This is illustrated below.

Estate size£600,000£600,000
Nil Rate Band£325,000£325,000
Net Estate£275,000£275,000
Charitable GiftNil £27,000
IHT rate40%36%
Tax due£110,000£89,100
Net Estate to Beneficiaries£490,000£483,400
To CharityNil£27,500

By making a donation of 10% of the net estate to charity, the estate benefits from a £20,900 IHT saving, the nominated charity benefits from a £27,500 donation, whilst the other beneficiaries only lose out by £6,600.

If you are interested in utilising some of your wealth to support causes that you feel passionate about, speak to your adviser at Manse Capital. We have the knowledge and experience to provide guidance in this area.