In 2017 there was a 20 per cent increase in charitable giving by the wealthiest donors, according to research by the Charities Aid Foundation1.
Why are so many high-net-worth individuals turning to philanthropy?
The primary motivation of most philanthropists is to give back to society after a fruitful career. They recognise that they have the financial resources, and often the skills and experience, to have an impact on societal problems.
The UK Government (and most other governments around the world) recognises the contribution that philanthropists make and provides generous tax reliefs to incentivise giving. This article is too short to do those tax reliefs justice, but with some planning it is usually possible to ensure an optimal tax outcome for donors.
In the UK, most people thinking about donating to charity will be aware of “gift aid”, which allows a charity to reclaim the basic rate of tax on cash donations and the donor to reclaim the higher and additional rates. For additional rate taxpayers, this relief can nearly double the effective value of a donation. There is also a generous relief available on gifts of land, listed shares and shares in some investment funds, allowing the donor to offset the full value of the gifted assets for income tax purposes.
There are significant non-financial benefits to philanthropy for the donor. Many philanthropists wish to “make their mark” and leave a legacy which future generations of the family can look back on proudly. With this in mind, charities are usually happy to recognise the contributions made by generous donors by naming a building or project after them or including special thanks in publicity for the charity.
Donors also recognise the importance of philanthropy in shaping future generations of their family. This can mean preventing negative outcomes for their family; some donors give most of their wealth to charity to avoid a significant inheritance disincentivising their children from leading productive and fulfilled lives. Where a number of family generations are working together, the sense of shared vision and common purpose can be a great unifying force. Many of our clients seek to develop the next generation by involving them in the management of the family’s charitable funds, to introduce them to investment management and increase their social awareness. If a family has its own charitable foundation, the next generation can also be on the board of trustees and can gain expertise in governance, investment matters and in managing a significant organisation.
When an individual has made the decision to start engaging in philanthropy, what are their options?
Many people dip a toe into philanthropy by making gifts to a well-known charity, perhaps to fund a particular project. This is a good option for people who want to make an impact in areas which charities are already engaged in, such as education, medical research, or arts and culture. It allows the donor to make a significant contribution, without the costs or administration of setting up their own charity.
Some donors have a longer-term vision for their philanthropy, and prefer to set up a family foundation to make grants which may be for purposes which are strictly charitable or of a wider philanthropic nature. There will be a board of trustees / directors making decisions about how to spend the foundation’s funds, and this enables the donor to influence how the funds are used.
This is often particularly important for entrepreneurs who wish to link the business they have created to the charity they are passionate about developing. Some donors give the shares in their business to the family foundation so that the business can continue in perpetuity and fund charitable giving. Donors who prefer to retain the business could instead commit to giving a proportion of the profits to charity each year.
It is worth giving some thought to how the family foundation is structured and what country it should be based in. This will depend to some extent on where the charity is intending to make grants, but also on where donors will be based, the tax consequences, and the level of regulation on charities in different jurisdictions. In many cases (for example, the UK, US and Switzerland) it often makes sense for the charity to be based in the same country as the primary donor if the donor wants to get an income tax deduction on donations.
Setting up a family foundation is not without cost or administrative burdens. UK charities are required to submit annual accounts and annual returns to the Charity Commission and comply with relevant legislation. Donors who do not wish to deal with the administrative side may prefer to set up an account with a so-called “donor advised fund” (DAF). DAFs are charities set up to facilitate philanthropic giving. The donor donates assets to their DAF account and the DAF makes grants on the donor’s behalf (provided it is comfortable the grants are for charitable purposes). This gives the donor a similar level of control to a family foundation without having to deal with the administration of running a charity.
Whilst grant-making charities can be highly effective, some philanthropists (particularly entrepreneurs) prefer more innovative ways to make an impact, even if these do not always bring the same tax benefits as traditional philanthropy. For this reason, there is a growing interest in social impact bonds, where investors fund a social impact project and receive a financial return only if there are sufficiently good outcomes. For example, a government body might commission a charity to run a project to help those with disabilities into work on a payment by results basis. The investors who funded the charity to run the project would only receive a return on their investment if the charity was successful in helping sufficient participants into work.
For the most committed philanthropists, the final option is to establish a fully operational charity or a social enterprise – a trading company established with particular social goals in mind. The organisation could carry out charitable projects itself rather than simply funding them, allowing the philanthropist to be actively engaged in the work of the organisation and leverage their business experience for social good.
While this might seem a dizzying array of options, the main point to take away is that philanthropy is not a set path; philanthropists can shape their giving depending on their motivations, their level of engagement and their stage of life.