Family wealth planning: a gift to charities?

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 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 planned giving more attractive to the wealthy.

Reputation is now all important. Not only do we have the Sunday Times Rich List but recently the Sunday Times published a list of the UK’s top tax payers. Paying tax is seen as a good thing to do. 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 H M Revenue & Customs accept.

The appetite for high risk strategies has gone; clients are more interested in their reputation and being regarded as good citizens. It is notable that the Sunday Times’ recent publication of “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” for such a person would consider not only questions such as:

• 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?

Also, nowadays, the important question of giving/philanthropy comes up – 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.

Sometimes this may involve the creation of a family foundation, allowing the next generation to understand the value of their family’s wealth by working with their elders on its administration. On other occasions, it may involve other structured giving.

Research has suggested that millennials are more likely to give than previous generations, and this kind of approach to family wealth can often be enthusiastically embraced by the younger generations of a family.

Structured giving

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 charities? Or will a “donor-advised fund” fit the bill? Then there is the question of social investment, and the availability of Social Investment Tax Relief (SITR). 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, although it’s not clear why this is.

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. Furthermore, if a higher rate taxpayer makes a gift to charity in relation to which the charity is not able to claim Gift Aid, he or she cannot reclaim the difference between the basic rate and higher rate of tax from H M Revenue & Customs. This suggests that good advice has not been received!

So, what more can be done to increase structured giving?

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 increase philanthropic giving and social investment) has been making the case to H M Revenue & Customs for the creation of such gifts (called “Living Legacies” or “Charitable Remainder Gifts” (CRGs)), to promote charitable giving among 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 then receive an income from the donation during his lifetime, with this income being subject to income tax. The donor would also 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 to be done is to make sure that clients are getting the right advice. Advisors must be prepared to raise the question of giving with their clients, and make sure they are knowledgeable about the options available.