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Charity no longer begins at home for many Britons

April 2007

Many charities rely on voluntary donations for the majority of their fundraising and over the past few years, an increasing number of people have embraced their philanthropic side by giving money to charities from their salaries and in their wills.

However, the way in which people donate their money and the efficacy with which it is received by organisations has been subject to changes in recent months, which according to a leading charity law expert, are likely to cause the second biggest hit to the sector since 1999, excluding the raid on the Big Lottery Fund to pay for the London Olympics.

“The Chancellor's change to tax dividends for charities eight years ago was estimated to have cost the sector over £250million a year in lost revenue and the most recent Budget statement brings an equally significant change to their fundraising methods,” explained Stephen Claus, senior associate in Birmingham and London law firm Martineau Johnson's charities team.

“The Gift Aid Scheme currently allows charities to reclaim income tax on money donated to them through people's wages. However, the 2p reduction in the standard rate of income tax means that from April 2008, Charities will only be able to reclaim £2.50 on every £10 donation rather than the £2.82 they currently receive.”

According to HM Revenue & Customs, Gift Aid tax refunds paid £750million to charities in 2005/6 and for many organisations it makes up over 10% of their voluntary income.

“This change is likely to cost charities an estimated £71million a year and a significant reform in donation procedures and a re-education of donors will have to take place to put this right,” added Mr Claus, a former assistant charity commissioner.

“Whilst the income tax cut means more money in individuals' pockets, it remains to be seen whether this will give rise to increased voluntary donations, particularly from those in the 22%, soon to be 20%, tax bracket, who have benefited from the reduction and make up the majority of charitable donors.

“Donors in this tax band must now be aware that a £10 donation from their wages must be increased to £10.26 in order for the charity to receive the same amount and that this will in fact leave the donor no worse off when income tax cuts are accounted for,” added Mr Claus.

“However, despite the Government's pledge to work with the sector to raise awareness, such an education process is likely to be timely and putting the onus on donors to change their pattern of donation is not a favourable position for charities to be in.”

One area from which charities are receiving more donations is the increasing number of wealthy individuals choosing to leave their fortune to charity rather than their children.

Following the lead of Microsoft-founder Bill Gates and American billionaire Warren Buffett, a growing number of rich Britons are putting charity before family.

“Many people, often self-made businessmen and women, believe that leaving substantial amounts of wealth to their children can undermine their ambition and be damaging to their future.

“And as Mr Buffett's philosophy puts it, children should receive enough money to do anything, but not enough to do nothing,” commented Mr Claus.

To avoid this situation, Bill Gates and his wife set up a number of charitable foundations, including the Bill and Melinda Gates Foundation, which helps with the fight against Aids, Malaria and Tuberculosis and many UK business men and women are becoming advocates of this trend.

“As well as protecting their children from the spoils of such riches, the current climate has also made people more aware of the need to give something back to the community and this has been beneficial for charities.

“However, such donors must still be aware of how to leave their money to such organisations in the most tax efficient way,” Mr Claus added.

“Ordinarily legacies to charities in a will are exempt from inheritance tax,” explains Sarah Wood, an Associate in Martineau Johnson's private client team.

“But care should be taken if other assets are being left in the will that take advantage of business property relief or agricultural property relief as this will limit the relief available on the gift to charity.”

“Thanks to a change in culture and the last month's budget, charities are currently experiencing a very mixed bag of changes, but the underlying message is that donors must review their own situation and make sure that their donations are being made in the most tax efficient way,” explains Mr Claus.

“Whilst the income tax reduction presents itself as a positive change for most people, it is potentially very harmful to charities and could cost them millions if people do not change their ways.

“A significant simplification of Gift Aid administration and a reduction in the minimum qualifying donation may make some headway into making up the shortfall but existing donors' actions will make the biggest difference and charities will be embarking on a re-education process over the next twelve months to address this.”

For further information please contact Keith Dudley on keith.dudley@martjohn.com