Tax Effectiveness

Charitable trusts are established for a variety of reasons. For many individuals, the primary purpose for setting up such a trust is to provide some sort of framework and structure to their charitable giving. However, another often cited reason for choosing a charitable trust over other forms of giving concerns the comparative tax effectiveness of these trusts.

Gift Aid

In the first instance, it is important to understand Gift Aid. While this scheme applies to individuals making donations, rather than to the trust itself, it is still a major consideration as it affects the tax treatment of those donations. This scheme offers individuals a method by which they can make donations to charity in a tax-efficient manner.

Donations made with Gift Aid are written off against income tax for the individual making the donation, meaning that they are factored into year-end tax accounts as if they had been made after the deduction of income tax. Once so-called 'transitional relief' has been factored in, this means that charities therefore receive up to 28 pence more for every £1 donation from a basic rate taxpayer.

If, as is frequently the case, the settlor (that is, the individual establishing the trust) is the major donor, it will be reassuring to hear that any assets transferred by the settlor into the trust will be subject to neither income nor inheritance tax. This is in contrast to assets placed into non-charitable trusts which, depending on value and circumstance, may have one or both of these taxes levied.Any donations exceeding the inheritance tax Nil-Rate Band (£325,000 for the 2010/11 tax year, and frozen until 2014) from a single settlor into a non-charitable trust will be subject to a flat rate 20% tax; this is not the case for donations into charitable trusts, which clearly massively increases their tax effectiveness.

Investment Income

It is also important to remember that any income derived from assets placed in the trust will be drawn tax-free. In many cases, charitable trusts develop and sustain themselves through effective investment of the assets that they have at their disposal. The way in which these assets can be invested will often be determined in the terms of the trust deed, but regardless of this any investment or saving income will be exempt from the relevant taxes that would otherwise be paid if the trust did not have charitable status.

Finally, charitable trusts, even when established as a corporation, will be exempt from corporation tax. This can represent as significant a saving as the income tax exemption. There are also exemptions available for regular tax concerns such as business rates. There is an 80% exemption on business rates available by default to all charitable trusts that run their own premises. As the trust grows and bigger premises are required, a higher exemption may be granted depending on circumstances. In these situations you should seek advice from your council or Tax Office directly.

The tax implications of establishing a charitable trust can be complicated. In order to ensure that your trust is operating in as tax efficient a manner as possible, you should seek professional financial advice, preferably from a solicitor or accountant specialising in the charitable sector.