09 April 2020 - Article
Withers is a global law firm representing a significant number of the wealthiest individuals and families in the US, Europe and Asia. In the UK alone we act for nearly a quarter of the Sunday Times Rich List. In addition to having many high net worth individuals who establish and fund charities, Withers LLP acts for a substantial number of charities, many of which are ‘household names’. We are in the unique position amongst legal advisers to charities and philanthropists in that we advise on both sides of the Atlantic.
The head of our Charities and Philanthropy Team is Alison Paines, Chair of the Charity Law Association and member Society of Trust and Estate Practitioners (STEP) Charities Special Interest Group. Clive Cutbill leads our philanthropy practice and chairs the STEP England and Wales Philanthropy Advisors Group and the Community Foundation Network Professional Advisor Council, as well as being a member of the Philanthropy ‘Steering Group’ and the Charity Law Association Standing Committee on Taxation. Richard Cassell is joint head of our global Wealth Planning practice and admitted to practise in Washington DC as well as in England and Wales. Richard is a member of the American Bar Association, the STEP International Committee and a trustee of the European Association for Philanthropy and Giving.
The Paper is wide-ranging in scope and we appreciate that it is intended to start discussions across a many aspects. We do not respond in detail below to each consultation point raised, as there will be others in the sector able to speak more effectively to, say, mobile giving and internet volunteering.
Philanthropy’s role in a culture of giving
We applaud the concepts underpinning the Giving Green Paper, in particular the need and desirability of fostering a culture of giving in the UK. To us, this must sensibly include both a greater number of gifts of significant value as well as a greater number of gifts of modest value, and should foster both philanthropic attempts to deal with systemic societal problems as well as responsive ad-hoc charitable giving. As a general comment then, the Giving Green Paper is to us too heavily focussed on encouraging low-value charitable giving and does not attend adequately to the great potential of encouraging high-value philanthropic giving.
ATM giving and ‘cost-free’ giving mechanisms such as ‘everyclick’ should certainly be taken forward by government, including the necessary facilitation in respect of Gift Aid declarations. However, we suspect that the nature of such systems will tend to channel many small donations to a limited number of established charities and may therefore be largely irrelevant for those who have large sums to give, particularly those donors looking not to top up the funds of a large established charity, but to make their own impact.
The Giving Green Paper seeks response on the government’s role in entrenching social norms for giving and what generally government can do to support and increase giving. We understand that the Cabinet office is looking at the role of tax incentives and working closely with Treasury in this area.
We wish to preface our comments on this point by emphasising that in our collective experience in the US and the UK: donors and philanthropists do not give in order to obtain tax relief; no system of charitable tax incentive that we have come across has the effect of putting the donor in a better net financial position after the donation; and at the end of the transaction, the donor may have benefitted from some relief, but she or he has still parted with the donation itself. Instead, donors tend to be genuinely interested in making the donation – at their own net loss – because they want to put their assets to work for something they believe in. The more the donor can benefit the charitable project (or the lower the net loss to the donor), the better.
With that preface, it is our view that the single most significant thing the government could do to foster a culture of giving in the UK is to introduce (and subsequently publicise) additional giving incentives to increase the ‘portfolio’ of giving alternatives. We consider that the following reliefs should be seriously considered:
(a) *Works of Art
*The discrepancy between the treatment of a gift of a work of art on death and one made during lifetime should be eradicated and relief in relation to income and capital taxes should be made available on lifetime gifts.
To this end, we would strongly support an extension of the existing charitable tax relief available in respect of land and qualifying securities to works of art. We do not accept that issues around the valuation of art should be prohibitive, considering the mature market for valuation and the mechanism already available in relation to transfers on death such as acceptance in lieu of tax scheme .
(b) *Lifetime Legacies
*Together with the European Association for Philanthropy and Giving and others, we have been involved over the years in raising awareness about the advantages to introducing a tax-efficient means of creating Lifetime Legacies (or ‘Charitable Remainder Trusts’) in the UK.
In simple terms a Charitable Remainder Trust (CRT) is a means of making an irrevocable gift to charity of a capital sum, while providing an income stream to the donor during his or her lifetime.
This type of Trust is a common and effective planned giving mechanism in the US and tends to be taken up primarily amongst those donors who might be described as ‘mass affluent’, that is comfortably off (often as asset rich but cash-poor) and not in a position to give up the income which would be lost by making the capital gift outright at the time the CRT is set up.
It is clearly within the spirit of the Giving Green Paper to encourage and facilitate giving by this ‘mass affluent’ demographic, and it is our view that a relief in this form would encourage both new donors and generate increased levels of giving from some existing donors. We urge the government, Treasury and HMRC to consider seriously the sensible proposals and relevant evidence which is available on this issue.
We note that the Giving Green Paper raises for discussion the possibility that ‘foundations’ might be required to make a minimum annual payout as is the case in some other countries. We understand that the government has not made a proposal of this nature, but is instead seeking to encourage conversation on the subject.
In our view, a minimum payout is both unnecessary in and unsuitable to the legal, fiscal and regulatory landscape in England and Wales for various reasons, including:
(a) Unlike jurisdictions such as the United States (US), which at the federal level requires a 5% annual minimum spend, the whole of the UK now has specialist charities regulators which already police the accumulation of reserves. In England and Wales for example, the Charity Commission has given clear guidance on reserves policies and trustees are expected to justify their positions by reference to the needs of their own charities not a formulaic rule.
(b) More fundamentally, the UK does not have a legal, regulatory or fiscal concept of a ‘foundation’, let alone the concept of a ‘private foundation’ as there is in the US. Therefore, imposing a minimum spend in the UK would mean either a radical departure from existing charity law and regulation to create a new form of ‘private foundation’ (requiring government expenditure far out of line with any savings) or else imposing it across the board on all charities, with ‘operating’ charities having to report on a minimum spend they will have vastly exceeded because the requirement is completely inappropriate to their operations and expenditure.
© If the minimum spend figure is set too high, there would clearly be capital erosion over time, even for permanently endowed funds, so the principle of perpetuity of charitable funds could be abrogated. (In the US, it is worth noting that the Federal law which requires minimum expenditure overrides the terms of the charitable instrument which are subject to state law and may require the assets to be retained in perpetuity. In England and Wales, we would need to expressly rewrite the whole law relating to permanent endowment);
(d) If a minimum payout is considered, it should be noted that the US allows for certain types of expenditure to count as qualified distribution and there are some circumstances where some functional assets can be carved out of the total asset value. It is possible that many UK foundations which might otherwise be seen as paying out too little already ‘distribute’ at or above a 5% level if they were able to account for their expenditure according to the US rules. If this were to be the case, a new requirement of this sort would just add another onerous obligation without an increase in actual grant-making.
(e) In broad terms, a restriction of this sort is unnecessarily prescriptive for the UK and takes the discretion in relation to balancing the needs of current and future beneficiaries out of the hands of the trustees (where it belongs).
There is a strong emphasis in the Giving Green Paper on the opportunities which technology in its many guises may bring to giving. We broadly agree that technology offers an exciting range of possibilities and our clients are interested in ways of giving online, via mobile phone and the impact of social networking on fundraising. For this reason, it is imperative that HMRC examine the requirements of the Gift Aid system in light of changing technological possibilities.
We were pleasantly surprised to see the prominence afforded to asking, thanking and honouring in the Giving Green Paper. We leave the substantive response on this consultation point to fundraising sector bodies and charities, but merely point out from our perspective that honouring giving is about more than ministerial thank you letters or a national philanthropy day. The cynical distrust of those who give away large sums of money is encouraged, we think, by an attitude that sees tax reliefs on charitable donations as some sort of a ‘reward’ to the donor, at best, and a vehicle for fraud or tax evasion at worst. Whilst acknowledging the real threat of charitable fraud, we urge government, HMRC and Treasury to move away from this ‘reward’ perspective and instead consider – and publicise – charitable tax reliefs as being redirection of the tax on the donor’s hard-earned income (which available because the donation itself has been given away).
A similar point can be made in relation to the Lifetime Legacies proposal; a cynical view of the donor’s retained lifetime interest will certainly not encourage giving or honour the very generous impulse to give an ultimate gift on death of the capital sum.
This links in to the consultation point raise in the Giving Green Paper concerning how the government might relate to media to facilitate and encourage giving. The government cannot of course control cynicism in the media concerning philanthropy (nor should it), but it can ensure that charitable reliefs are well-publicised in a manner that respects the generosity of the donor.
One of our colleagues recently attended a Global Philanthropy conference in New York at one of the major academic centres for fundraising and philanthropy in the US. The conference attendees widely represented the best of US fundraising and philanthropy, from universities and museums to major corporate foundations. The keynote speaker was Dame Stephanie Shirley.
In our view this sort of presence and profile matters in the world of global philanthropy. It matters that the UK was visible and that Dame Stephanie was able to share and receive wisdom on giving and asking. We would urge the government to retain the position of (at least one) ambassador for philanthropy. We also consider that an ambassador for philanthropy has an encouraging effect closer to home on fledgling philanthropists.
Corporate giving is incredibly important to the giving culture as a whole. We are not clear what concrete steps are or may be proposed to increase this sort of giving, however. We would encourage the government to promote corporate giving in all its guises amongst small to medium size businesses in particular and to consider how to encourage consumers to engage with and evaluate the philanthropic efforts of the businesses they patronise.
We welcome the opportunity to contribute to the discussion around giving that is currently taking place. We too are optimistic about the capacity for society to give – we regularly see individuals and businesses looking to make a real impact at significant giving levels. However our optimism is tempered by realism; without further incentives and a shift away from a culture of that tax relief is a ‘reward’ for the donor, we fear the giving culture to which the government aspires will prove elusive.