Charitable gifts using trusts

 

Last month I provided an outline of the legal and tax considerations when making charitable gifts.  This month we continue the topic of charities with an update on the law applicable to charities and we cover key considerations of   using charitable trusts. This article is based on English law. 

Charity law 

All charities must comply with the following:

• - the Charities Act 2011
• - the Charities (Protection and Social Investment) Act 2016
• - the Charities Act 2022
• - Charity Commission Regulations

The key piece of legislation is the 2011 Act which replaced and consolidated the earlier charity law, namely Charities Acts 1992, 1993 and 2006. 

The 2016 Act gave charities the power to make social investments; increased controls on fundraising; increased the threshold for automatically disqualifying potential trustees and increased the powers of the Charity Commission. 

The latest of the above, the Charities Act 2022, includes some, mostly technical amendments to the 2011 Act which are designed to make administration of charities simpler. These amendments are being implemented in stages, with most due to come into force later in 2023.  

Charities set up as trusts must, in addition, comply with the relevant trust legislation, namely the Trustee Act 1925 and the Trustee Act 2000. 

What is a charity? 

In England and Wales, a charity is an institution that is established for charitable purposes only. For an individual donor, a charity would likely be constituted as a trust, either during their lifetime or on death via a Will. 

Charitable purposes 

To qualify for the special tax status the charity must have charitable purposes. Section 3 of the Charities Act 2011 includes the following key charitable purposes: 

• The prevention or relief of poverty
• The advancement of education
• The advancement of religion
• The advancement of health or the saving of lives
• The advancement of citizenship or community development
• The advancement of the arts, culture, heritage or science
• The advancement of amateur sport
• The advancement of human rights, conflict resolution or reconciliation, or the promotion of religious or racial harmony or equality and diversity
• The advancement of environmental protection or improvement
• The relief of those in need by reason of youth, age, ill ­health, disability, financial hardship or other disadvantage
• The advancement of animal welfare
• The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services 

Public benefit requirement 

In addition to having "charitable purpose" it is also essential that the “public benefit” requirement is satisfied.

A charity must be for the benefit of the public as a whole or a sufficient section of the public. A purpose is not charitable if it is mainly for the benefit of specified individuals.  The term 'private charity' is therefore a misnomer, although the term is sometimes used to denote a charity set up, for example, by an employer company to relieve poverty of its ex-employees.  It is clearly not possible to set up a 'charity' which is designed to help a group of private individuals, for example family members. 

Charitable trusts 

Although charitable trusts are probably the most common form of charity, a charity can also be set up as an unincorporated association, a company limited by guarantee or a charitable incorporated organisation (CIO).  For those in England and Wales who wish to set up a charity, drafts of model constitution documents are available from the Charity Commission.

Where the charity is set up under a trust, the governing document will be the trust deed or the Will creating the trust.  In the case of an unincorporated association, the governing document will be its constitution or rules.  In the case of a charitable company, its governing document will be the Memorandum and Articles of Association.

A charitable trust is like any other trust in that it must name the trustees and set out the trustees’ powers and obligations, the trust property and the trust beneficiaries. 

In order to qualify for tax exemptions a charity must be registered with the Charities Commission. The Commission will inspect the trust document to ensure that it is eligible for registration. Separate registration with HMRC is then required (see below). 

Setting up your own charitable trust: A brief guide 

There is plenty of assistance available from the Charity Commission, as well as HMRC, on how to set up a charity (and prospective settlors should refer to this or preferably seek professional advice), so here is just a brief explanation. 

There are a number of steps to setting up a charity. First, you need to find trustees for your charity - you usually need at least three. This is clearly the most important task: you need to find people who are willing and are able to make important decisions on your behalf (especially after your death) and who will be able to cope with possibly quite a lot of work.  This could include various aspects of reporting and accounts, obviously depending on the sums involved and the level of discretion given to them. 

It is important to remember that charitable trustees must at all times comply with the charities legislation and must take care when they distribute funds to ensure that any distributions meet the definition of “charitable. The trustees are answerable to the Charity Commission in respect of how they allocate the trust funds. 

Next, you must make sure the charity has "charitable purposes for the public benefit"’, as explained above. Both HMRC and the Charity Commission have guidelines on how to best word your purposes. The most important thing to remember is that a charity must be for "public benefit" so including your family members, even if the purpose was, say, education, will not be acceptable. 

Next you should choose a name and structure for your charity. The name should not be similar to the name of an existing charity or be misleading.

As for the structure for your charity, if we assume that your charity will be set up as a trust then obviously a trust deed will need to be executed. Next, the trustees will need to open a bank account and set up accounting procedures, depending on the sums involved.

Finally, you may need to register your charity. There are in fact two different and separate registrations. First is the registration with the Charity Commission - this is only required if your annual income is over £5,000 or if you set up a CIO. Separate from this is registration with HMRC if you want to claim any tax reliefs, including Gift Aid. There is plenty of guidance on registering a charity on the HMRC and the Charity Commission websites. 

Once up and running, all charities must prepare accounts and make them available on request. Registered charities must prepare a trustees’ annual report and make it available on request. In addition, all registered charities with an annual income of over £10,000 must prepare an annual return. Again, plenty of guidance is available from the Charity Commission. 

Comment 

If setting up your own charity sounds too complicated, which may be the case for most, setting up a discretionary trust with a list of potential charities as beneficiaries, but with the trustees having discretion as to which charities should benefit, may be a simpler choice. A letter of wishes from the settlor should provide further guidance on their preferred choice. 

Of course, as indicated last month, an “ordinary" discretionary trust, which includes, say, family members as well as charities as potential beneficiaries, will not qualify as a charitable legacy for the purposes of the 10% IHT rate reduction, nor for any of the other tax breaks available to charities. However, if any appointments are made by the trustees of such a trust within two years after the death of the testator, they will be “read back" into the Will, so, as long as there are advancements to qualifying charities made by the trustees within those two years, the same result will be achieved as if there were outright charitable legacies included in the Will.  

Next month we will look in more detail at choosing suitable investments for charities.