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2 About Taylor Wessing Taylor Wessing is a leading international law firm in Europe, Asia and the Middle East. Our clients include leading financial institutions, major corporations, public sector bodies and wealthy individuals and families. What makes us different is our forward-thinking approach to serving clients. We think creatively about business issues and are constantly looking for new and better ways to add value. By doing this, we come up with truly innovative solutions that help to grow our clients businesses. Key Contacts Mustafa Hussain Tom Gauterin 2
3 Contents Introduction...4 Part 1 What is a charity?...7 Part 2 What is the right structure and how do I set it up? Part 3 How can my family get involved? Part 4 How do I make my donation tax-efficient? Part 5 What cross-border matters should I think about?...21
4 Introduction For many individuals and families, making a difference to lives and communities through philanthropy can be the culmination of their life s work. A family charity can be a great opportunity to contribute to a range of good causes and can help to engage younger generations in the process of running the charity and in the work it undertakes whilst developing an understanding of family values. There are, however, a great many things to think through before starting to make donations. Which causes will you support? How will you select them? What happens when you want to take a step back? What structure works best for you? Are there any tax issues? All of these matters are further complicated for internationally mobile families, who will also need to know how charities and other philanthropic structures are governed in different countries. 4
5 Much of this can be best dealt with by thinking it through at the beginning of the process, including taking advice, and creating both a structure and an appropriate governance system that can do everything necessary to achieve your charitable aims. In the UK, there is a well-developed charity industry in which structures and processes have been refined over many years. The generous tax treatment offered to charities established in the UK adds to the attractiveness of UK charities, as does the variety of legal options available, which serve to provide philanthropists with greater flexibility than is on offer in many jurisdictions. This guide, The TW Philanthropy Passport, is intended to highlight some of the key issues that philanthropists need to consider both at the start of their journey, and whenever changes to their existing arrangements might be made. 5
6 Part 1 What is a charity? 6
7 Part 1 What is a charity? A charity set up in the UK has to be established: 1. with exclusively charitable purposes; and 2. for the public benefit. The charity is run by its trustees (whose role is fully explained in section 2 of this handbook). The range of possible charitable purposes is very wide. If donors want the option of supporting a range of different causes or if they are not quite certain where their interests lie then it is possible to establish a charity for general charitable purposes, to be decided on at the trustees discretion. Public benefit means, in broad terms, that the charity has to be able to benefit a sufficiently large number of people for its work to qualify as beneficial to the public, rather than beneficial to an especially restricted group of individuals (such as a family). The requirements to operate both for exclusively charitable purposes and for the public benefit are the two chief ways in which a charity is different to a private family trust or foundation (which are of course set up for the benefit of a small number of individuals). There is no one answer as to the appropriate purposes of a charity; these will depend entirely on the wishes of the founder. The charity might focus on one issue supporting medical 7
8 research into a particular disease, or promoting opera or it might be established with the aim of offering flexible support to a range of causes. Either way, the proposed scope of a charity s work is a crucial consideration at the start. When deciding what their charity is intended to achieve, then, philanthropists need to think about: which causes they wish to support: where their efforts should be directed; and over how long. Occasionally philanthropists will, for instance, donate significant sums with the intention of making a big impact very quickly (and then winding the charity up once the funds have been disbursed), while many others will wish to set up a charity that invests its funds so as to spend only the income over as long a period as possible. Some might wish to support their given cause in one area - a single city, perhaps, or a county while others intend to provide funding across a whole region, or even to key projects across a continent. Once this has been decided upon, the next stage is putting in place a framework to deliver those ambitions. That framework is of crucial importance to the success of the donor s ambitions, since assets gifted to charity cannot be taken back. A donor therefore needs to be confident that he is gifting funds and/or assets into a structure which he is satisfied will deliver his or her wishes as far as possible. 8
9 Part 2 What is the right structure and how do I set it up? 9
10 10 Part 2 What is the right structure and how do I set it up? There is no specific structure that has to be used to create a charity. There are three main options, the choice of which will depend on what the charity is intended to do. These are: Charitable trust Often the simplest option for a philanthropist who wishes simply to disburse funds (and many donors will already be familiar with the concept of trusts). The significant disadvantage is that a trust does not have any separate legal personality of its own, so if the trust were to incur liabilities greater than the trust s assets, the trustees could be personally liable to meet them. In general, grant-making is a low-risk activity but it is still possible for such trusts to incur significant liabilities. Given that trustees must employ staff, hold property and enter into contracts in their own names, they can suffer from employment claims for wrongful dismissal, or damages and costs from property or contractual disputes. Changing trustees can also be more difficult as assets must be transferred from the old to the new. Charitable Incorporated Organisation ( CIO ) This form has been recently introduced. It aims to provide trustees with limited liability, without the need for company regulation (see below). It can in practice do everything a trust can do but has the advantage of creating a distinct legal personality that offers trustees protection from liability and allows them to employ staff, hold property and contract in the name of the CIO. The main
11 disadvantage is that CIOs may find it more difficult to borrow than companies (because there is no equivalent of the central register that records charges secured on company assets). Company Limited by Guarantee ( CLG ) CLGs have until recently been the vehicle of choice for charities which have wider operational needs, e.g. employing staff, renting premises and running events with potentially significant liabilities. Because it is a limited company, a CLG offers its trustees protection from personal liability, but at the expense of requiring them to wear two hats: one as company director, the other as charity trustee. Company law is both wide-ranging and onerous and, in general, the costs of running a company are higher and the rules to which trustees need to adhere more complex. Choosing a suitable format is a key consideration for any charity and is a matter that we can advise on in detail once donors have a plan as to what their philanthropic work will involve. Once established (whether as a trust or as a company), the charity must be registered with the Charity Commission for England and Wales. The Charity Commission is one of the world s leading charity regulators, but it generally practises a light touch approach. The registration process can take some time so it is sensible to build that in to any business plans for the new charity. Registered charity status promotes confidence in the charity from the public, other potential donors and from partners, many of whom will make registered charity status a condition of working together on any joint projects. The status also confirms that the charity is eligible for the very generous tax treatment given to charities in the UK (explained on the next page). 11
12 The choice of vehicle and the registration process are, however, only part of the story. The most important factor in the success of any charity is its board of trustees who, regardless of the charity s legal format, are the people who manage and control the charity. They are ultimately responsible for the direction the charity takes, what it does, and how it does it. It is therefore essential that the board of trustees is chosen wisely, with regard to the individuals experience and particular skills. Many charities make the mistake of appointing a group of like-minded enthusiasts, only to discover that they are unable to grapple with many of the practical issues that a charity faces (e.g. finance, legal matters, accounting, fund-raising, managing staff and so on). This is of less importance if the charity plans simply to disburse funds, but even then it is often beneficial to have the knowledge of an experienced trustee available when negotiating the terms of a grant. If the charity develops into a larger organisation with greater operational needs, the day-to-day management can be delegated to paid executive staff, but the overall responsibility for reviewing the work of those staff and maintaining the charity s standing remains with the trustees. Most if not all donors will wish to be trustees themselves, so it is important for them both to ensure that they get on with their own board, and to have suitable policies in place governing the recruitment of trustees for the future. 12
13 If trustees are the single most important factor, this is followed closely by having a carefully prepared set of policies to deal with how the charity is to run. At its simplest, this could be a letter of wishes setting out a donor s broad intentions. We would always recommend, however, that a proper plan is drawn up that details the aims of the charity in the short and the long terms, and that explains which areas are to be supported. If the charity is set up to support medical research, for instance, there is obviously a huge range of possibilities within that broad remit and the charity cannot possibly support them all, so an explanation of funding priorities and how the charity might wish to act would be useful here. Although not subject to heavy regulation from the Charity Commission, charities are nevertheless in the public eye and it is therefore important that the charity is run efficiently and maintains its good standing. The Commission has wide-ranging powers, in the event that something goes wrong, to investigate the charity and so proper records need to be maintained and comprehensive policies adhered to in respect of key decision-making. In particular, and of special relevance where there are several members of a family involved with the charity, the charity must have a policy to aid it in handling conflicts of interest as it is inevitable that these will arise from time to time. Taylor Wessing can assist with the shaping and drafting of plans and policies and has a great deal of experience in establishing what donors need to put in place to ensure the success of their charity. 13
14 Part 3 How can my family get involved? 14
15 Part 3 How can my family get involved? When setting up a charity, successfully involving the next generation of the family is often top of the list for many philanthropists. For some, this represents the best chance of their philanthropic wishes being fulfilled after their lifetimes; for others, it enables them to ensure that their children (who may be wealthy and lacking in motivation) maintain a sense of purpose; and for still others, it makes it possible to emphasise the value of giving something back in the longer term. Philanthropists typically aim to have their children take part as members of their charity s trustee body. This has the advantage of ensuring that family members who know their wishes well are able to retain control of the charity s operations. Usually, this means that family members will be involved at a strategic level and can guide the overall direction that the charity takes. Depending on the charity s activities, though, some donors prefer to allow their children to work on individual projects at the operational level before moving to a board position. This will vary according to the appetite each individual has for the charity s work, but introductory tasks could include: research; working alongside other charity employees on a voluntary basis; talking to other potential donors known to the family; 15
16 organising a small fundraising or awareness event; or shadowing a senior member of charity staff to learn what the job entails. A good way for children to be introduced tends to be where they have relevant professional experience themselves; if they have worked as an investment manager, accountant or lawyer, for instance, they may be able to attend board meetings as an observer but providing assistance when issues on which they are able to advise arise. Donors whose charities have been running for some time will be particularly aware of the need to prepare their successors to take over. For hands on charities which run operational projects this may involve some of the possibilities listed above; for charities which restrict their activities to making donations to other charities, it is of greater importance that a donor s successors understand the donor s plans and motivation so as to guide the charity into the future. In any event, a prudent donor would be well-advised to consider putting their long-term plans in writing and discussing them with both children and fellow trustees. If the family has drawn up a family constitution, the approach to philanthropy can form a part of that so that everyone is clear as to the way ahead. Philanthropists do need to recognise that future circumstances may change and that it is not strictly possible for them to fetter the discretion exercised by their trustees - but a letter of wishes, and family members who understand the scope and thinking behind such wishes can go a long way toward maintaining a philanthropist s charitable priorities for many years after they have died or retired. 16
17 Part 4 How do I make my donation tax-efficient? 17
18 Part 4 How do I make my donation tax-efficient? The tax regime for UK charities is among the most generous in the world and offers a wide variety of opportunities for taxefficient giving. The best-known of these is the Gift Aid scheme, whereby individuals can donate any income taxable in the UK and the charity can reclaim an additional 25% from the Treasury. For donors who pay the higher rate of income tax the charity receives the basic-rate tax through Gift Aid and the donor can reclaim the higher rate portion via their tax return. Donations to charity are exempt from capital gains tax and so offer a useful way of gifting assets which stand at a significant capital gain without incurring tax. Lifetime donations are exempt from inheritance tax (whereas gifts to normal trusts can incur a 20% charge). Donations to charities on death are also exempt. If a gift is made to charity on death that is at least 10% of a donor s estate, then it can reduce the rate of inheritance tax payable on the rest of that estate to 36%. If a charity is planning to raise funds by means of sales (or some other form of business) or running fund-raising events, then specialist advice should be taken as such activities need to be properly structured in order to prevent unnecessary tax charges. Trading and fund-raising are not, in themselves, exclusively 18
19 charitable, and will be subject to income or corporation tax unless correctly handled. Under normal circumstances, however, this can be done so that any surplus goes to the charity free of tax. One vital point for all donors is that they must not, in any circumstances, retain any interest in (or receive any gratuitous benefit from) their charity. If they do, there is a risk that their donations will be treated as tainted and will lose the tax advantages. 19
20 Part 5 What crossborder matters should I think Part 1 What is a charity? about? 20
21 Part 5 What cross-border matters should I think about? Many philanthropists have interests (whether personal or business) in different countries, and this will have an impact on their charitable arrangements. On the one hand, they will wish to ensure that they give in a tax-efficient manner wherever they are; and, on the other, they will want to make sure that any donations given to projects and individuals in other countries are properly handled. In most countries, charity law follows broadly similar principles but, where a donation is being made overseas, it is always worth checking that the recipient would qualify for a donation under English law. This is not always easy to determine as different social concepts (and modes of expression) mean that some activities that are treated as charitable in one country may not necessarily be so in the UK. If a UK charity made a donation that looked right but actually was in breach of the terms of the charity, that could lead to personal liability for the trustees. If in doubt, trustees should be encouraged (by donors if necessary) to seek specialist advice. We would always recommend that a charity conducts suitable due diligence when making a grant (which should be properly documented with a claw back option if the recipient fails to deliver on any of the conditions attached to the grant). That is particularly the case when making overseas donations, as the distance involved makes it harder to oversee any projects that have been funded. 21
22 Tax is a key consideration in cross-border matters. Favourable tax treatment in any one country will depend on adherence to its charity laws, and there will invariably be local differences. In the US, for instance, 501(3)(c) organisations can donate more easily to the promotion of business and entrepreneurship than they can in the UK (where questions of private vs public benefit need careful handling). This type of discrepancy is one on which advice should be sought, as it can determine where a project should be established. Within the EU, recent case law has established that tax relief should be given in any member state on donations to a charity in any other member state which makes Europe an attractive place to run a charity now that this barrier has been broken down. For many international philanthropists, another issue will be how a UK charity fits into their existing wealth structuring arrangements. An offshore trust company can act as a trustee of a UK charity, but this can be difficult at registration as the Charity Commission prefer at least one trustee to be UKresident. This does not create the same problems as having UK resident trustees of a private trust, though, as tax is generally not in point for charities. UK charities exist in perpetuity and so are compatible with trusts in many offshore jurisdictions (which increasingly do not impose a limit on duration). If a UK charity is not suitable for an international philanthropist, we can still advise on the setup and operational framework, assisted by one of our international offices or network firms to cover foreign law aspects. 22
23 Key Contacts: Mustafa Hussain Partner, London +44 (0) Tom Gauterin Senior Associate, London +44 (0)
24 Europe > Middle East > Asia Taylor Wessing LLP 2015 This publication is intended for general publication and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices operate as one firm but are established as distinct legal entities. For further information about our offices and the regulatory regimes that apply to them, please refer to: regulatory.html NB_001413_