Should I Set-Up My Own Charitable Trust?

Many clients gift money to charity regularly and some leave legacies to charity in their wills. There is in fact a handy tax benefit to leaving money to charity in your will. If you leave 10% of your taxable estate to charity, the inheritance tax (IHT) on that estate is reduced from a rate of 40% to 36%. If you are paying higher rate income tax and are still working, giving money to charity regularly might mean that whilst you are getting higher rate income tax relief now you might not in the future. We advise clients who are getting 40%, 45% and even 60%+ income tax relief on their donations but if they carry on giving into their retirement, the relief will drop to 20%. In these cases it is worth considering setting up your own charitable trust now and rolling up all future donations into a single lump sum paid now. This is effective where you have sufficiently high income now to benefit from higher rate income tax relief on the whole lump sum now. It is even more effective if you can gift taxable investments to the new Charitable Trust and gain both capital gains tax relief (on the gain) and income tax relief (on the full value). For a triple tax benefit you can then leave 10% of your taxable estate to the new charitable trust.

Pros

1. •Immediate income tax relief at your highest rate of tax.

• •20% goes to the trust and the balance comes back to you as cash via self-assessment.

2. •Immediate capital gains tax relief on investments gifted that have an embedded gain.
3. •Inheritance tax relief if you gift 10% of your taxable estate to the trust in your will.
4. •Control over future donations made from the charitable trust, as trustee.
5. •The ability to invest the lump sum now to gain growth to grow future donations.
6. •Income tax and capital gains tax exemption on the growth and income in the trust.

Cons

1. •There are some legal costs to establish the trust, unless you are happy to use the Charity Commission provided specimen trust document.
2. •The new trust needs to have a bank account that can accept a £5,000 donation to get started before registration.

• •Many banks won’t open an account until after registration.

3. •The trust will then need to be registered with the Charity Commission.

• •Some clients have handled this well but if you want a professional to do it there will be more fees.

4. •The trust will then need to be registered with HMRC.
5. •The trust will need to make an annual return to both the Charity Commission and HMRC.

• •Fees for this are not huge but should be taken into account. As a structure it obviously doesn’t work for everyone. If you need extensive support from lawyers and accountants with drafting, registration and ongoing compliance then a sensible minimum donation might be £100,000 to make sure that not too must of the donation is lost to fees. If you are content to do most of the work yourself or ask your adviser to help, then the minimum’s fall substantially. We have advised multiple clients with the set-up of these trusts from our offices in Hampshire and across the country.