It’s a grand word, giving the impression that acts of philanthropy are only possible for the super-rich, rather than the majority. However, the evidence is that people really like giving and, if given the opportunity, will often choose to use their wealth to benefit society.
Tax planning – the new approach
There are specific tax advantages to planned charitable giving, in relation to income tax, capital gains tax (CGT) and inheritance tax (IHT), but society’s attitudes to tax planning more broadly have shifted in such a way as to make giving more attractive to the wealthy.
Reputation is increasingly important. Not only do we have The Sunday Times Rich List but not long ago the same newspaper published a list of the UK’s top tax payers. While organising one’s affairs in a tax efficient way is attractive, seeking to exploit a loophole in legislation these days has become high risk unless there is an established practice of exploiting that particular loophole which HMRC accept.
The appetite for high-risk strategies has reduced with many individuals being interested in their reputation and being regarded as good citizens. It is notable that The Sunday Times’ recent publication of “the top 50 taxpayers”, perhaps as importantly, included “notable absentees” from the list. These absentees may well have structured their affairs entirely legally, but are still being “named and shamed” by the media. There is then, of course, The Sunday Times Giving List, publicising the charitable donations of more than 300 significant donors – a far preferable list in which to appear.
Family wealth planning: a new focus
Alongside this shift of focus in tax planning, we’ve noticed an increased interest in clients thinking about how they and their family interact with their wealth. They’re asking what it’s all for. So often they say that they don’t want their wealth to mess up their children’s lives. Wealth generators are therefore keen to explore, and record, their vision and values; how they expect their children and later generations to deal with the family wealth, so that they can be educated on their obligations and duties in respect of it. They want a framework of how it is to be used and include provisions for clear governance.
A typical family “blueprint” would consider:
- Self-sufficiency – should family members be expected to work or should the family wealth provide for all their needs?
- Entrepreneurship – should it be encouraged and supported?
- Does the family want to be in business together going forwards or should wealth be split with family members going their own way?
- Where there’s a family business, should family members be encouraged to engage with it or be supported in pursuing their own personal objectives?
- Philanthropy – is it to be encouraged? Is being a good citizen within the family and community important and, if so, what does it mean?
Wealthy individuals are wanting to instil in their families a good way of operating and to develop a healthy relationship with the family wealth. They want to set the culture and direction of travel for the future. At the same time, research suggests that millennials are more likely to give than previous generations.
Clients want to see their giving make a difference. What sort of charities should they support? How do they identify need? How do they evaluate success? Should they have their own charity? Or will a “donor-advised fund” within a master charitable trust set up by a provider fit the bill? Then there is the question of social impact investment – for some it may be attractive to recycle the return received from an investment in a social enterprise or charity into other social investments, alongside traditional grant making. Taking advantage of the under-used Social Investment Tax Relief (SITR) may also be beneficial. There are now so many options available and advising clients on their choices is a specialist area of its own.
Disappointingly, however, the evidence is that donors generally are not as structured as they could be, or would like to be, around giving – indeed, there is under-use of the tax reliefs available.
According to Government research, charities are missing out on £600 million per year because people are not enabling them to claim Gift Aid on donations. Failure to claim gift is bad news for a higher / top rate tax payer too as it means they can’t claim back the difference between the tax rate they pay and the basic rate of their donation.
Might it be time for a new relief to encourage lifetime giving?
We have encountered some interest in gifts that allow a donor to make a gift to charity in such a way that the donor retains a right to income from the gift during their lifetime, but the charity is guaranteed the capital sum donated on the death of the donor. Such gifts are possible in the USA, but not yet in the UK.
In the UK, Philanthropy Impact (a charitable organisation whose mission is to grow modern philanthropy) has been making the case to HMRC for the creation of such gifts called “Charitable Remainder Gifts” (CRG’s) to promote charitable giving amongst high net worth individuals and the affluent.
Very crudely, and in its simplest form, the donor making a CRG would make an irrevocable commitment to give to charity. The donor would receive income from the donation during his lifetime, with this income being subject to income tax. The donor would benefit from a one-off calculation of income tax relief for backward or forward offset. The initial donation would also be deemed to be a gift to charity for the purposes of CGT and IHT.
The benefit to the charity is that it would create supporter engagement with a living person as well as guaranteed future income. Meantime, the donor retains their financial security.
It seems to me that the case for CRGs is very strong. There are already tax advantages in leaving assets to a charity on death, but it’s not unreasonable to think that the scope for expanding philanthropic giving in the UK would be increased by the introduction of CRGs.
However, apart from the introduction of new reliefs, the most important thing is to make sure our clients are getting the right advice to ensure that they are making the most of the options currently available.