Charities & Not for Profit

Publish date

20 September 2022

You do not have to be a billionaire to give to charity

Yvon Chouinard, the billionaire founder of outdoor clothing retailer Patagonia, has announced that he is giving away his company to a charitable trust. This is an incredible act of charity, which could see around £87 million a year going to causes to help fight climate change.

Mr Chouinard is not the first to use his immense wealth to try and help make a difference in the world. Bill Gates has vowed to come off the rich list by making huge donations to philanthropic funds. MacKenzie Scott has donated more than $3.8bn of the fortune she made through Amazon, to hundreds of causes.

What are the tax rules when gifting money to charity?

While the majority of us may not have billions or even millions of pounds at our disposal, it is still worthwhile considering gifting money to charity, either while still living, or on death. Not only can such gifts make a lasting impact, they can also reduce your exposure to certain taxes.

For example, it has long been a characteristic of UK Inheritance Tax law that any money passing to a registered UK charity, whether through a lifetime gift or as an inheritance following someone’s death, is exempt from Inheritance Tax. For deaths on or after 6 April 2012, the Government introduced a new lower Inheritance Tax rate of 36% provided that, in simple terms, 10% of the residuary estate passes to charity (though inevitably the rules are more complex than this).

It is also worth bearing in mind that charities can also benefit by way of a post death variation.  In other words, even if no gift to charity is made under the deceased’s Will, the beneficiaries of the estate can redirect some of their inheritance to charity using a deed of variation.  The same applies if there is no Will and the estate passes to the beneficiaries under the intestacy rules.

Such gifts to charity are “read back” for Inheritance Tax purposes if they are made within two years of death.  This means, for tax purposes, the gifts are treated as if they had been made by the person who has died.  This allows for inheritance tax relief on the deceased’s estate including access to the reduced rate of inheritance tax if a sufficient portion of the estate passes to charity under the variation.

When should you consider setting up a charitable trust?

If an individual does not know which charity they would like to benefit, an option to consider is setting up a charitable trust, as Patagonia’s owner has done.  Charitable trusts can be established during life or on death and they allow for a greater amount of control over how the funds are used.  As long as they are properly run and registered with the Charity Commission if necessary, all of the tax reliefs will be available when gifting to a charitable trust founded by the individual making the gift.

Generally charitable trusts operate by making grants to more established charities but they can also be used to carry out charitable work directly.

The only significant downside is the level of administration needed to run a registered charity and therefore, we generally only advise clients to establish charitable trusts if they have the commitment to run them and are intending to gift at least £500,000 to the trust. Otherwise, there are different options available to individuals looking to give smaller amounts.

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