As part of the great wealth transfer expected over the next two decades many advisers are gearing up for more enquiries about donating to charity, and facing questions over what to do.
According to HM Revenue & Customs, there were 1.3mn donors in 2023 – up from 1.27mn in 2019 – declaring a donation on their self-assessment; 37 per cent of these were from those earning above £250,000, while those earning under £50,000 donated a larger part of their gross income, 3.3 per cent.
Charles Mesquita, charities director at wealth manager Quilter Cheviot, says: “There has been a significant increase in people who are reasonably wealthy wanting to give money to charity.” He receives about enquiries once or twice a week from people wanting to donate money or other property.
James Gladstone, head of wealth planning at Cazenove, where clients are at the super wealthy end, says: “Most of them are motivated by their own desire to do something. They might be first generation wealthy people who have made all their own money, they have a good connection with the value of money and what it means.
“One of the biggest concerns is how they pass on their wealth to their children in a way that’s going to be helpful – it can be a burden rather than a blessing.”
The reason there is greater interest, he says, is that it can be a way for the family to bond and for the children, even if adults, to understand the value of money and the good it can do.
“If they grow up in a privileged environment, they’re not conscious of the world around them and [charitable giving] can be a helpful introduction.”
The value of donations declared via self-assessment came to £3.9bn in 2023, down from £4.1bn in 2022, affected by a decrease in value of shares and property donations to £400mn; gift-aided cash remained the same at £3.5bn.
The simplest way to donate is to give the money directly to charity, which works if the donor already knows who they want the money to go to. It is more complicated if they do not, and particularly if they want to make a strategic long-term commitment without knowing precisely who they want to give money to and when.
Donor-advised funds
There are also tax implications: a donor can receive income tax relief on the donation made to charity, as well as allowing the charity to receive gift aid, which may affect the timing of making the donation if there is a big liquidity event about to happen.
Many in the charity advice space are suggesting clients consider giving to donor-advised funds, as a way to give to charity all in one go, to manage the tax relief, but without the necessity of distributing that money straightaway.
They are also more anonymous than setting up a foundation, which in itself is a burdensome task, and involves hiring staff and getting checked through the Charities Commission.
DAFs are charities themselves, and they allow the donors’ funds to accumulate over time, and they distribute grants on the say so of the client. They are well connected in the charity sector and will conduct their own due diligence of a charity the donor might be suggesting, as well as knowing the major charities that people may want to donate to.
Those in the DAF field – a sector that is very well-established in the US – say that they can set up an account in a few days. The money will be managed by a fund manager who will charge a fee to the portfolio, and the gifts can be either cash, shares or property.
Gladstone says of these funds: “They’re not designed to sit there and grow over time; these tend to be actively used, and the intention is that the funds are to be given away.
“They will have a much higher level of distribution within the mandate, as opposed to a private client fund. Of every £100 coming in, £15 is going out – it needs to be spending its money. If it’s not giving away anything, what is the purpose?”
The fund will be treated as the client’s discrete fund, it is not pooled with other donors’ funds.
The largest DAF in the US, which has a huge philanthropic sector is the National Philanthropic Trust. In the US it manages $42.9bn (£33.9bn) of assets; NPT UK, which it is affiliated to, manages about $500mn.
John Canady, chief executive at NPT in the UK, says: “If you know where you want to give, [giving directly] is a very good choice. But if not, and you want to give over the longer term and think strategically about how you want to deploy assets for some good, DAFs are a longer term option. ”
Canady says NPT is helpful if one is planning one’s giving over time. NPT charges an administration fee to cover operating expenses, annual audits and tax filings.
“The charitable trust is a popular giving vehicle if you have a large amount of money, but you need a couple of million or more to justify the trust and manage the asset as an endowment, and give money away over time.”
This involves setting up a legal entity with all that entails, he says. “The DAF, you come to us and open that within 48 hours, which is much quicker than setting up a trust.
“The donor recommends grants to many charities around the world – they choose the charity, and we process the grant.”
Edward Garrett, head of private clients at the Charities Aid Foundation, another DAF, says: “It’s completely bespoke, they are getting all the benefits of heading a private foundation; the perception is they are giving up control, because we have the decisions to say yes or no”.
This is due to due diligence checks. “But the reality is if they set up their own private foundation they would still have to comply with charitable law. Sometimes a private foundation can take a bit more risk.”
He adds that a DAF is essentially a fund for charitable giving, a single registered entity covering the administrative, operating and compliance overheads for a multitude of underlying funds.
The client can choose who they would like to appoint as the manager of their funds, and this manager will charge a separate, often lower fee. However, the DAF may have some restrictions on the investment manager a client uses, although people often choose the same manager who looks after their private wealth.
If you set up your philanthropy and giving during your life, it’s more difficult to change your will on death.
The DAFs can also work with the donor if they are stuck on how to spend the money, such as connecting with experienced philanthropists, perhaps in a chosen field of work.
Anna Josse, chief executive and co-founder of Prism the Gift Fund, which has distributed about £500mn over its 20-year lifespan, says: “We work with a number of strategic philanthropists, and offer them to [donors]. If someone says, ‘I’m interested in social mobility’, we will make introductions to people in that sector.
“We had someone who gave us £1mn and said, ‘I want to create something around social mobility’. I connected them with Sir Peter Lampl of the Sutton Trust. He now gives every year to the Sutton Trust.”
Tax incentives
The element many may wonder about is the tax incentives. Charities receiving a donation can automatically apply for gift aid, which gives them another 25 per cent on top of the donation.
Then for higher rate taxpayers, they can get the balance back of the tax they have already paid on the donated money, through their tax return.
So the charity receives the basic rate of tax that has been paid, assuming the donor has paid sufficient tax, and the recipient gets the balance of the higher rate, on the full amount of the donation, plus the gift aid.
This means that a £100,000 donation becomes £125,000 with gift aid, and then the donor, if they are on the higher rate, can claim the higher rate 40 per cent, minus the 20 per cent taken by the charity on their tax return, which means 20 per cent of £125,000 or £25,000.
Gladstone says: “You get the full amount of tax relief through your tax return, and income tax relief on the full amount of the donation. We’ve found [tax relief] has encouraged people to give more.”
With shares, a donor can give shares to charity, and the charity pays no capital gains tax, because they have not directly made a gain on the capital increase, but there is no gift aid. However, the donor can claim income tax relief on the gross amount of the shares donated.
The other benefit is leaving a donation in one’s will, where one can also receive IHT relief.
If one leaves at least 10 per cent of one’s estate to charity, then the IHT on the rest reduces to 36 per cent, from 40 per cent.
However, Mesquita advises making donations when one is living.
“There’s been an increase in people contesting wills. If you set up your philanthropy and giving during your life, it’s more difficult to change your will on death.
“So what I’ve been saying to clients, rather than wait until you die, why not have some fun now, if that’s want you want to do, rather than leaving it in your will.”
Melanie Tringham is features editor of FT Adviser
