Charitable foundations provide a way for donors – whether individuals, families, or businesses – to create a strategic approach to their philanthropy in order to make a real impact on society. As well as benefitting their chosen cause, charitable foundations also provide various advantages to the donors.
1. Formalising a charitable strategy
Making a formal charitable giving plan is a strategy that individuals, families and businesses can use to be more intentional about their giving. Not only can this help to focus their giving in order to make a real impact, formalised charitable strategies give donors greater fulfilment from their philanthropy.
When donors have a more strategic goal to their giving, they find focus in their philanthropy, and feel less pressure from fundraisers for other causes. Instead, they can make meaningful change within the issues that are important to them.
A charitable giving plan can also form part of a donor’s overall financial strategy. Rather than sporadic donations to causes that appeal to them throughout a year, donors can define an amount that they can reasonably afford to give to charity on an annual basis and feel more financially prepared for the year ahead.
A formalised charitable strategy is an opportunity for donors to identify the issues that are important to them. They might have charities that they traditionally support on an annual or monthly basis. Thinking more strategically about philanthropy allows donors to explore other causes they would like to support, which align with their values and address issues they feel passionate about.
It is much more impactful to focus donations on one cause, rather than giving small amounts to a wide range of organisations. A charitable strategy gives donors purpose and helps them to focus on the causes they really care about.
2. Gift Aid
Gift Aid was introduced in the UK as part of the 1990 Finance Act as a way for charities to reclaim the income tax that has already been paid by individuals who have made donations.
The process sees the government give 25% of the total donation value to the charity at no extra cost to the donor, assuming they pay the basic rate of UK income tax.
For donors who pay a higher rate of tax, donating to charity actually means they can claim money back on their donations – this amounts to the difference between the higher rate and the basic rate.
For donors looking to provide support to good causes outside of the UK, or that aren’t already supported by a registered charity, a foundation provides a way of making sure all future donations qualify for Gift Aid.
3. Brand and family recognition
Family foundations are becoming a recognised and attractive vehicle for modern philanthropy. This is a growing trend in the UK, where family foundations have traditionally not been as popular as they are in the US. Family foundations offer a way to unify family giving – consolidating a whole family’s philanthropic efforts into one issue, creating a stronger association between the family and their chosen cause.
Increasingly, people of all ages also expect businesses to give something back, consider their social and environmental impact, and have accountability and purpose as part of their business strategy. Creating a charitable foundation shows a commitment to placing social purpose at the heart of a brand’s corporate strategy.
Charities naturally create an emotional response in people. Having a personal connection to a specific cause means that the brand or family associated with that cause will automatically foster a sense of trust that has the potential to develop into a lasting emotional relationship.
4. Tax relief
Making donations to charity can be an effective way to reduce income tax, particularly if the donor’s income falls into the band that is eligible for the higher or additional rates of tax. For tax purposes, the value of charitable gifts is deducted from the donor’s total income. Charitable donations can also reduce the assessable income for tax credits.
Taxpayers whose income varies, and so pay different rates of tax each year, can even ask HMRC for donations made in one tax year to be applied to the previous tax year in order to increase the value of personal tax repayment. This may be beneficial to donors who face a large tax liability in one tax year but do not make a charitable donation until the next year.
Donors do not pay tax on any shares, land, or property that they donate to charity. The most significant tax relief offered by the UK government applies to donations of listed shares and other investments including units in an FCA-authorised unit trust and interest in an offshore fund. Donors do not have to pay the usual capital gains tax that would arise from disposing of shares at a gain when donating these to charity. Donors will also receive income tax relief for the year of the donation – reducing their taxable income by the market value of the qualifying investments. Higher rate taxpayers can claim income tax relief of 40%, while additional rate taxpayers can claim 45%.
Gifts left to charity in a will are also subtracted from the value of the donor’s estate before inheritance tax is calculated, resulting in a tax saving of 40%. If more than 10% of an estate is left to charity, the inheritance tax rate is reduced to 36% for the balance of the estate that is not being donated.
5. Leave a legacy
Establishing a charitable foundation is a way to create a sense of permanence in an individual, family, or business’s philanthropic efforts. Such foundations, particularly those created by families, aim to leave a legacy that can be continued by future generations. Foundations are often founded in the name of a loved one, in order to honour a relative who
has passed away. Charitable foundations can unite family members behind a common cause and create a stronger bond between relations.
As well as donating through a charitable foundation throughout their lives, individuals can also donate to their charitable foundation through their wills. The foundation would then use these funds to continue their charitable activity after their death. Surviving family members can find it comforting to continue their relative’s work as a way of remembering them.
Not only is starting a charitable foundation a way to give something back to society, there are many benefits available to the founders. Contact us to find out how easy it is to set up your own foundation.
Disclaimer: Tax law and the basis of tax can change. You may need to seek advice from a tax adviser on tax-related matters. We can help suggest a suitable adviser if that is helpful. Please contact us for details.