Family philanthropists have new way of giving

Charities across Scotland are watching with interest to see just how major rule changes coming next year around pensions and Inheritance Tax (IHT) may affect legacies and donations to them.

A recent technical note issued by HM Revenue and Customs (HMRC) certainly seems to have focused minds that change is coming - and that charities may need to work with financial planners and lawyers to ensure they are best prepared.

Enquiries are rising - and we expect them to continue doing so - with the new rules essentially reversing a decades-old exemption, meaning most unused pension funds, along with certain death benefits, will become subject to IHT.

Helen Kidd is accredited as a specialist in charity law by the Law Society of Scotland

A growing point of discussion among charities is whether giving to them may actually benefit from this change, with legacies to UK-registered charities remaining IHT-free and counting towards the potential reduced rate of IHT (36%) when 10% or more of an estate is left to charity.

For many, these are complex situations and require careful discussion with expert financial advisors.

But while all of this is happening, I am having an increasing number of conversations with individuals and families who are considering which legal model for supporting good causes is the best fit for them.

And there is no doubt that the Donor Advised Fund (DAF) is on the rise.

A DAF allows for money to be ring-fenced for either short or long-term charitable giving. It is generally regarded as a flexible, tax-efficient way of giving and is becoming more commonplace in the UK philanthropy sphere. It is an alternative to establishing a standalone charitable family foundation and is widely regarded as offering advantages including those around speed, costs, tax, administration and regulatory responsibilities.

The question of foundation versus fund is one which many are currently mulling.

There is no doubt, where there is a strong desire for control around areas such as grant making, investment decisions or family legacy, a standalone foundation is usually preferred. Individuals and families are, however, increasingly considering the merits of a DAF given that it avoids trustee duties and regulatory responsibilities.

DAFs are also increasingly attractive to people who do not have family or partners to take on the responsibility of a family foundation when they are no longer there, dealing with succession.

Charities do not, of course, have to be established in perpetuity and a DAF can make it more straightforward for a fund to exist for a defined period.

Fundamentally, DAF founders - or their families - are in control of where the funds are donated, which can range from choosing the charities to broader grant-making parameters.

In theory, a DAF structure may afford the donor the choice and flexibility to be involved in the grant making in as little or as much as they might like, subject to the terms of the arrangements with the DAF provider or community fund.

Ultimately, family philanthropy can be hugely rewarding and can make a huge impact, often lasting beyond a person’s lifetime. It is critical for the future of our charities and the work they do, in countless ways.

With tax changes looming, there is a lot to consider. If you are considering giving, finding the legal model that works most effectively for you and your legacy is essential.

Helen Kidd is a Partner and Head of Charities and the Third Sector at Lindsays