12th August 2019
The UK came 11th in the 2017 World Giving Index and 7th when scores were aggregated over five years. Compared to the USA, philanthropy in the UK is still very much growing.
The introduction of giving vehicles such as Donor Advised Funds (DAFs) has enabled massive growth in philanthropic donations along with increasing knowledge of how to give tax effectively.
Donor Advised Funds: A Powerful Tool for Giving
With over £110 billion under management in the USA DAF market, the DAF has become one of the most popular vehicles utilised for philanthropic giving.
In the UK, it is still not widely known but is growing. In 2017 contributions to Donor Advised Funds increased to £481 million, a 36% increase compared with the previous year’s contributions.
These contributions total 4.7% of all individual giving in the UK. Charitable assets in DAF accounts total over £1.3 billion—an increase of 24% over the previous year. *
Wealth managers and large legal and accounting firms are adopting DAFs as a tool for their clients, recognising how these charitable accounts are increasingly the way forward in terms of the best option for the client and whereby the advisor can and does play a role in the client’s philanthropy.
The trend of donors using the structure as a viable, tax-effective, alternative to a charitable trust or foundation has grown as the demand for an efficient, flexible and cost-effective structure increases.
What you need to know about Donor Advised Funds
A DAF follows the same premise as an ‘Own Name Foundation’, it is a ring-fenced, charitable account under the auspices of a registered charity. The funds of which can be distributed according to the wishes of the account holder/s to charitable causes all over the world.
Donors can also give anonymously. Prism the Gift Fund is a UK registered charity that provides services to philanthropic, high net worth individuals and families, who use their Prism DAF as a time, cost and tax-effective alternative to having a Foundation.
These act as a tax-effective UK hub for their giving, without the setup and ongoing costs associated with establishing a standalone charitable structure.
What can donors’ gift to their Donor Advised Fund?
Donors can make gifts of shares and property into their DAF, but most commonly donate cash, which comes with the well-known UK charitable tax relief: Gift Aid.
Donations that qualify for Gift Aid are not only topped up 25% by HMRC, where appropriate but also have the added incentive (if applicable) of a rebate to the value of either 20% (for 40% ratepayers) or 25% (for 45% ratepayers) of the gross donation.
Donors can make gifts of shares listed on any stock exchange in the world recognised by HMRC to their DAF. Gifted shares not only come with full Income Tax relief at the highest rate but also pass free of Capital Gains Tax.
A Donor, who is a 45% taxpayer, looking to gift £40,000 of shares could benefit from Income Tax relief of £18,000 making the net cost of their donation £22,000.
Once Prism has sold the shares, the cash is added to the Donor’s DAF and can then be onward gifted to charities and social enterprises all over the world. Use Prism’s Gift Aid calculator to see what your donation will cost you.
A gift of property from Donors can either be sold or rented, with the proceeds/rental income credited to their DAF. There are tax reliefs associated with gifts of a property to a Charity and Donors may be eligible to claim Income Tax relief and pay no Capital Gains Tax.
A property donated to Prism that originally cost £450,000 and with a current value of £1,000,000 would entitle the donor to claim Income Tax relief on the value of the donation, worth up to £450,000 to a 45% taxpayer. In this example, the donor has created a charitable pot of £1,000,000 at no cost.
There is a myriad of ways to give to charity. In April 2012, the government introduced a new tax incentive for gifts left in a will. Since then, campaigns such as “Legacy 10” have tried to raise awareness of the incentive in the donor community.
Inheritance tax relief applies to those wishing to gift 10% of their estate (or more) to charitable causes. HMRC will reduce the rate of inheritance tax on the rest of a Donor’s estate from 40% to 36% to reflect the 10% charitable contribution.
The burden of the donation falls mainly on HMRC – for every £1 donated, 76p comes off the Inheritance Tax bill, and 24p comes from beneficiaries. Use Prism’s calculator to see what this could mean for you.
The benefits of a DAF over a Foundation
“Set up your own Foundation with the Charity Commission” is the answer many individuals receive when they decide they want to donate large gifts and grants to charities close to their hearts.
In truth, setting up a Foundation is legally onerous, expensive and time-consuming; with a whole host of responsibilities and due diligence placed upon your trustees in the current regulatory environment of the Charity Commission. To avoid the cost, time and complexity of this, you can set up a DAF.
A DAF can be set up immediately while a foundation currently takes 6-9 months for Charity Commission approval and the added time spent registering a bank account.
This is in addition to finding and appointing a board of knowledgeable trustees, trustee training, creating policies and grant application templates, finding an accountant and an auditor for annual accounts and the process of setting up an office for the day to day running of the foundation.
Time is then required to process applications, open mail, file and store documents, liaise with beneficiaries, claim Gift Aid, administer grants, conduct the appropriate level of due diligence and stay abreast of the latest developments and requirements of UK Charity Law.
There is then the annual/biannual board meeting to arrange and minute, set an agenda, and prepare board papers.
A DAF costs on average 1/5th of the running costs of a foundation. This figure is based on a conservative average cost to create and administer a foundation which includes office and staff overheads, legal fees, accounting fees, auditing fees, reporting costs and expenses.
This is without factoring in the value of the time that HNW philanthropists spend on their foundation set up. With a DAF, the cost is divided amongst the administration of multiple client accounts. Clients pay a fixed quarterly fee based on the level of administration required to service their philanthropic giving.
A DAF comes with the built-in expertise and confidence in navigating the Charity Commission rules and regulations. Highly knowledgeable trustees oversee compliance and governance.
A DAF offers a simple way to tax effectively give to charities without the burden and responsibility of running a foundation correctly and efficiently. With a DAF, a donor has peace of mind, and they simply email their personal relationship manager asking to donate on their behalf.
The donor may receive tax relief upon donating to their DAF, but there is no obligation to decide where to onward gift immediately.
Can I leave a gift in a will to a DAF?
For Legacy Giving, donors name the DAF in their will as the recipient of their estate. A DAF provides donors with a solution to making gifts in a will that does not require unwanted legal responsibility for beneficiaries or setting up a complete new charitable entity.
For more information on legacy giving, get in touch with one of Prism’s relationship managers.
Finding the Right Donor Advised Fund
There are different DAFs in the UK market that service donors differently. Prism’s ethos and service offering are flexible with a tailored approach to client’s needs.
Donors can gift cash, shares, property and art to their DAF, without the need to grant out immediately and they can make overseas gifts while still benefiting from UK tax relief, as Prism is a UK registered charity.
In addition, the donor has the option of having a balance of assets managed with an investment firm of their choosing (this is often where their personal wealth is held).
A donor can choose to make a gift anonymously or be recognised unlike with a foundation, where accounts are public record, and everything is visible on the Charity Commission website.
Why You Need to Know About Donor Advised Funds
Given the change in the regulatory environment over the last three years, effectively creating and running a foundation is complex and shouldn’t be taken lightly.
The Charity Commission has created a Cyber Security and Fraud Unit and an Enforcement Unit; the regulations are now much like those of the Financial Conduct Authority.
There is also the issue of several high-profile charities collapsing or being “investigated” by the Charity Commission which has complicated the art of giving and requires expertise across a number of areas:
- Trustees with knowledge and understanding of the rules and requirements on making a grant the due diligence and reporting required
- HMRC regulations on tax-effective giving
- Keeping abreast of the ongoing policies that charities must have in place – safeguarding, whistle blowing and privacy to name but a few.
With over 200,000 registered charities it is staggering to note that there is around £750,000,000 unclaimed Gift Aid every year and so it is essential to address the needs of philanthropic individuals better to increase the flow of funds in the charity sector.
Streamlining the Art of Giving
Prism has worked with several grant-making foundations who have decided to wind up and instead open up a DAF. This allows a quasi-board to continue to determine where to gift but removes the onerous responsibility of being a Trustee. If Prism is satisfied with the due diligence required to donate a DAF, the donation can be made within 24 hours to a UK charity.
Compared to the 5-6 hours a week spent on hours of planning, liaising with charities, receipting, claiming gift aid, signing forms, reporting, authorising and administering a request before a foundation even processes a gift.
How to start a Donor Advised Fund
Setting up a DAF is easy and can be completed within 2- 4 weeks; considerably less time than registering a foundation /charity with the Charity Commission.
To set up a DAF with Prism the Gift Fund simply email or call Prism on +44 (0) 20 7486 7760, and we can immediately set up a meeting.
Key points to remember about Donor Advised Funds
- Donor Advised Funds are a time, cost and tax-effective alternative to setting up and having a foundation.
- Donors make an irrevocable gift of cash, shares, art or property to their Prism DAF without needing to decide where to onward gift straightway away.
- Donors request to make a grant to a charity around the world from their Prism DAF.
- A DAF gives the flexibility to have funds asset managed and to make gifts anonymously