Charity has the potential to be a very complex affair when you are dealing with large amounts of money. Wealthy individuals often choose to share their wealth through charitable donations, but simply signing up to a direct debit or handing over cash are less than suitable options. At the other end of the scale, charitable foundations are a well-known and effective method of passing your wealth to others, but the effort required to administer one can be significant.
Donor Advised Funds (DAFs) provide charitably minded high-net-worth individuals with a useful middle ground. The funds are established under an umbrella charity that administers them on behalf of the donor. The main advantages of this type of fund is that they are tax-efficient, flexible and less costly than running a foundation. The UK Charities Aid Foundation describes DAFs as a ‘one-stop shop’ for all of someone’s giving needs.
There are a wide variety of ways you can fund a DAF. The assets that can be contributed to a fund include cash, shares, non-cash assets and third-party entities. Gifts to the DAF are irrevocable, but the giver will maintain control over how the funds are invested or distributed. Assets within the DAF can be invested responsibly and grow over time, creating a positive impact before they are handed over to worthy causes.
How do DAFs affect tax?
The tax benefits of DAFs fall into several camps, according to National Philanthropic Trust UK (NPT UK). Contributing appreciated assets such as publicly traded securities or property will exempt you from the required capital gains tax. Any growth of contributed assets within the DAF will be tax free, although these will now belong to the charitable sponsor. Donors paying higher than a basic rate of tax are also eligible to claim the difference between their tax rate and the basic rate on the gross donation when filling in their self-assessment return.
Cash contributions to DAFs in the United Kingdom can also be eligible for Gift Aid, according to NPT UK. A further benefit of a DAF is that you can name relatives as successors on the account, engaging future generations in charitable giving and building a philanthropic legacy.
Giving while living is something that should be thoughtfully considered by those with accumulated wealth. Concerns around maintaining a certain lifestyle in retirement or facing unexpected expenses such as medical or caring fees are legitimate and need to be thought through. The choice can also be dependent on your level of wealth and the needs of your family. These factors could change during your retirement, so decisions around what you can afford to give need to be regularly reviewed. A consistent dialogue with a trusted wealth advisor is recommended.
Inheritance Tax
It is sensible to consider a DAF in comparison with alternative methods of charitable giving. One of the most common ways that wealthy people give money to charity is through donating part of their assets after they have passed away. Both giving through a DAF and giving through a will have advantages and disadvantages and it is prudent to consider them all carefully.9
The standard UK inheritance tax rate is 40%. This can fall to 36% on some assets if you leave 10% or more of the net value of your estate to charity in your will. The threshold for inheritance tax in the UK is £325,000 so there is usually nothing to pay if your estate is less than this amount. You typically don’t have to pay any tax above this threshold if you leave everything to your spouse, civil partner, charity or a community amateur sports club. Your tax-free threshold can rise to £500,000 if you leave your home to your children or grandchildren and your estate is worth less than £2 million. It is always recommended that you discuss inheritance with your family during your lifetime to avoid conflict down the line.
It’s important to realise you don’t have to rely on your estate to make tax-efficient charitable donations and that ‘giving while living’ through something like a DAF is a valid option. Making charitable donations while you are still alive means you get to see your money make a difference and influence how it is distributed.
At London & Capital, we understand that those that have accumulated wealth would like to use some of it for good causes and we want to make sure that any goals you have with regards to charitable giving are achieved.
