Thinking about your own mortality can feel macabre, but whilst death is a sombre event, it is also the point where many people choose to create their legacy by passing on their wealth to charitable causes. Whilst many choose to give charitable donations in their will, which can be a great way to mitigate IHT liabilities, it isn’t always the optimum way to give to worthy causes. Wills lack overall flexibility as you are ultimately limited to how donations are made. And the other most popular option – establishing a charitable foundation – can be expensive and complex.
Do it through a fund
Fortunately, there are ways to make the most out of your charitable giving and, increasingly, people are using donor advised funds (DAFs) to do this. These tax-efficient vehicles have been around since 1970, but recently started to receive greater interest and by 2018 £1.3bn was being held in DAFs in the UK.
DAFs are a tax-efficient way to establish and oversee charitable giving during your lifetime. They ringfence your money, allowing you to invest in a variety of assets and grow your capital tax-free. From your DAF, you can make grants to chosen charities with total flexibility and anonymity, should you want it. The popularity of this strategy is increasing and in 2018 alone £320m of grants were made to charities via DAFs.
Another advantage is DAF grants can benefit from Gift Aid, where the government tops up donations at an amount based on the donor’s tax rate. Gift Aid can be hugely valuable for both charities and donators (if the latter claims this back in self-assessment) but unfortunately cannot be applied to donations made in inheritance. Of the £3bn left to charities via estates in 2018, not a single penny was able to benefit from Gift Aid. A huge missed opportunity.
With a DAF you can also name relatives as successors on the account, engaging future generations in charitable giving and building a philanthropic legacy in your family. Encouraging any discussion regarding your inheritance is a positive thing, as according to HMRC only 24% of parents have discussed inheritance with their adult children. Even though your assets are yours to allocate as you wish, it’s important to make sure there aren’t any shocks hiding in your will and to avoid conflict where possible. This is one of the main reasons people end up in court contesting wills – and it’s a long-running and expensive process.
Don’t wait for the bitter end
For some people, wills work just fine and for others it can make economic sense to establish and run a charitable foundation. However, it’s important you realise you don’t have to rely on your estate to make tax-efficient charitable donations and that giving-while-living is a valid and feasible option. As well affording you greater flexibility in how you make charitable donations, giving while living also means you get to see your money make a real difference to causes that desperately need it.
There are numerous ways to donate to your chosen causes and sometimes it can call for a more nuanced approach than simply donating a lump sum in your estate. By talking with the team at London & Capital, qualified financial advice can help you decide the best strategy for you.
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