Tax-efficient donations - for a good cause

Earlier this month, at a ceremony held at the Scottish Parliament, six individuals including business tycoon and Kwik-Fit founder Sir Tom Farmer, the Aga Khan and representatives of the Hewlett and Packard families, received the Carnegie Medal of Philanthropy in recognition of the huge amounts of money they have donated to good causes.

Medals are presented every two years by the Carnegie Trust to philanthropists and their families who have dedicated their private wealth to public good.

The fact that this year’s ceremony marked the first held outside the US is more than a mere coincidence. The Carnegie UK Trust, one of 20 Carnegie foundations and institutes worldwide, has already commissioned a consultative study aimed at increasing the impact of what it describes as ‘progressive philanthropy’ in Britain, as part of a programme of action it intends to launch next year.

There have also been suggestions that the trust may attempt to address a perceived shortfall in charitable donations with a centre for philanthropic giving based in Scotland.

The move certainly comes as no surprise to those disappointed that the gesture of giving is not more widely appreciated on this side of the Atlantic. One such critic is Hilary Browne-Wilkinson, director of the Institute for Philanthropy, which was founded in 2000 to promote philanthropy in the UK and encourage everyone who can afford it to make regular, tax-effective gifts to charity.

She believes the introduction of a model prevalent in the US, which allows individuals to donate money to charity and at the same time earn an income from the donation, could be the way to boost UK charities’ coffers.

‘The institute was set up in 2000 by a group of lawyers working on tax,’ Browne-Wilkinson explains. ‘If you look at something like Gift Aid, the charity gets basic rate tax back, but not the donor – so that takes away the psychological impact for them. It doesn’t feel like a tax break.’

Slowly but surely, the landscape for charitable donations in the UK is changing as Britons devote more and more time to ‘giving something back’, and yet the amount individuals donate to charity still falls woefully short of other Western nations.

The percentage of individual giving to GDP is more than double in the US compared to the UK – in the US, $183.7bn (£104.6bn) was donated in 2002, 1.75% of GDP compared to £7.3bn, or 0.76% of GDP in the UK.

‘In the US, what made a big difference was the ability to give to charity through a charitable trust and get immediate tax relief, but also retain an interest in the trust. It’s a way to give money but keep an income for yourself.’

These trusts, or lifetime legacies, as the Institute for Philanthropy prefers to call them, represented donations worth $150bn in the US in 2003. Browne-Wilkinson and her team are lobbying the Treasury to introduce a similar concept in the UK.

In a nutshell, the idea is to allow individuals to put non-cash assets such as investments, property, shares and even works of art, into charitable trusts, allowing them to receive an income free of tax and for charities to receive a guaranteed gift on their death.

The Institute for Philanthropy believes the success of these types of schemes in the US is due to their broad appeal – not only to the charities, but also to donors and professional advisers who see them as a means to encourage clients in their philanthropy.

Tax benefits are complicated, but essentially donors receive an income tax deduction on the charitable gift element in the year the assets are put into the trust. If appreciated capital assets are put into trust, capital gains tax on the gain will not be triggered. Donors also receive tax relief on the income or capital gains on the assets that remain in the trust.

Tax advantages aside, studies show that donors are moving away from big national institutions to smaller charities where they feel they can make a difference. This mechanism plays a significant role in building relationships with charities. For donors, not only do these schemes appeal to their philanthropic nature, they also provide an income stream for themselves for the future.

‘Lifetime legacies would help donors who are unwilling or unable to release assets immediately and who are anxious about their financial security,’ Browne-Wilkinson says. ‘Individuals also see distinct advantages of being linked to a charity during their lives and believe their children are more likely to want to carry on the giving tradition as a result.’

There are some fundamental differences that go some way to explaining why the Americans are so much more ‘generous’ than their UK counterparts. There is evidence to suggest that Americans give more because it makes them feel part of a community. This is reflected in the causes they give to, mainly local churches and universities and alumni.

But there is also a huge difference in the way that Americans and Brits give – 77% of donations made in the UK last year were spontaneous, loose-change methods. In the US, 61% of the voluntary income of non profits comes through planned giving.

Almost a third of the UK’s population give less than £5 per year to charity, and most of them give nothing, according to the National Centre for Social Research. But among high net worth individuals, a very different picture emerges. A Lloyds TSB survey last year found that people with liquid assets of more than £250,000 would prefer to spend their money or give it to charity rather than pass it on.

Despite these signs that the UK is beginning to move towards more giving, there’s still a long way to go. But as John Quelch, senior associate dean of Harvard Business School, once pointed out, true altruism is extremely rare. ‘But mix it with a little bit of self interest and the chance the knock yourself down a tax bracket and you’d be amazed how generous the human soul can become.’

To find out about National Giving Week and how you could make a difference, go to www.nationalgivingweek.org