What is a Charitable Trust?
Charitable trusts are one of the most common types of trust in the UK. They offer valuable possibilities for individuals to give to charity in a tax-efficient manner, and can provide a useful framework for effective, targeted charitable giving.
At the most basic level, a charitable trust is very similar to other types of trust. As such, they are established by a 'settlor', who agrees to transfer assets into the ownership of the trust. The management of these assets is then carried out by trustees, who may or may not include the settlor.
Finally, trusts have a beneficiary - it is this party that derives the benefit from the assets that have been transferred into the trust. The main distinction between charitable trusts and other types is that the intended beneficiary is a charity or charitable cause.
ConstitutionIn fact, a charitable trust is legally considered to be a charity in and of itself. Many major charities in the UK are no more than charitable trusts; this provides an alternative to establishing a charitable company or association. Any charity that is constituted by way of a trust deed (a trust instrument in deed form, as is explained in an article elsewhere on this site) is deemed to be a charitable trust.
Although charitable and non-charitable trusts share many significant similarities, there are also a number of important distinctions. Primarily, in the UK charitable trusts are treated very favourably for tax purposes. In non-charitable trusts, the beneficiaries may well find that they are required to pay tax on any income that they earn from the assets held in trust, particularly if the beneficiary and settlor are the same individual. This is not the case for charitable trusts.
Similarly, all assets transferred into charitable trusts are tax exempt; again, this is in contrast with some non-charitable trusts, particularly those into which assets totalling more than the inheritance tax Nil Rate Band are being transferred.
Benefit and PurposeIn order to qualify as charitable, the beneficiary or beneficiaries of the trust must be charitable in themselves. Furthermore, however, the purposes of the trust must be deemed to be publicly beneficial. The Charities Act 2006 states that a charitable trust must have an identifiable benefit, and that this benefit must be "capable of proof". Thus, a purpose is not beneficial simply because the settlor or trustees believe that it is so; rather, this must be capable of proof through fact and evidence.
Furthermore, the purpose must be beneficial to either the public at large or to a section of the public; it is not enough for the trust to benefit individuals, and it is certainly not acceptable for the trust to benefit the settlor or the trustees directly. However, the size of this section of the public may be very small, depending on the nature of the purpose. It is acceptable, for example, for a charitable trust to benefit sufferers of a very rare disease or disorder.
The Charities Act 2006 changed the way in which charitable trusts operate in the UK. The provisions of this Act are covered in an article elsewhere in this section, which should be investigated by those who are considering establishing such a trust.