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Tim Williams, Senior Associate, Burges Salmon LLP

Hello and welcome to the new episode of death and taxes, a weekly podcast by the private client team at Burges Salmon. My name is Tim Williams and I'm a tax and trust lawyer in the private client team, together with my tax and trust colleagues Guy Broadfield and Edward Hayes will discuss a range of issues facing clients and professionals alike. In each episode, we’ll be joined by specialist lawyers from around the firm to bring you our views on important topics for private clients. In today’s podcast, we're joined by Alyssa Haggarty to talk about philanthropy and how private clients can achieve their charitable aims. Alyssa is a solicitor in Burges Salmon's UK private client team and regularly advises private individuals and trustees on charity law issues and governance including a range of charitable structures alongside her wider private client practice.

Tim

So Alyssa thank you for joining us today what we wanted to do was to talk through how our clients can best fulfill their charitable aims and there are lots of options I'm sure and lots of practical things to trot through, but if we assume that we've got a client who's recently sold their business say and they've got lots of spare cash and they want to put some into charity, broadly what are their options to do that.

Alyssa Haggarty, Solicitor, Burges Salmon LLP

Well, there are three main options you could make a gift to an existing charity or organization, you could make a donation to a donor-advised fund, or you might decide to set up a charitable entity of your own and that's where we come in and can advise on the best structure to suit the activities of the charity.

Tim

So I mean the first option there off giving to an existing charity I suppose you've got to, first of all, find a charity that your aims are aligned with, and there are lots and lots of charities out there, but I guess once you've given your money to the charity you have no say in what they it beyond fulfilling the charities charitable objectives. Is a danger advised fund more adviseable? Or how does that work?

Alyssa

It's sort of an in-between so you're right if you make a donation to a charity you have provided funds or assets but unless you are a trustee of that charity you won't have any say or control on how it's used or spent unless you've included specific instructions with your donation. With a donor advised fund you can make recommendations as to which charities the donation will be used for, and also include any specific limitations with that but if you would like ultimate control over how your donation is used and a say and to be involved then establishing your own charity will let you be more involved in the process, but along with that comes a time cost of running a charity and all of the compliance and obligations and duties under charity law that come along with it.

Tim

So let's assume our clients decided that they want to create their charity, there are presumably lots of different structures they can use you know chthe the is an objective, not a particular vehicle, so what can our client do who's got there cash what can they put their money into?

Alyssa

You're right Tim charities come in all different sizes so charitable status is separate from the legal if you sort of look under the hood and the first thing to do is to take advice on what type of structure would be best and the ideal structure really den what the charity is set up to achieve and how. So one of main points to consider is liability if you go with a charitable trust option the trustees are personally liable for the decisions of the charity and they remain so after retirement unless they're released, this can be sensible where charity is a grant-making charity which is quite popular, if the charity is going to hold substantial funds or have employees or own and deal with property then having a limited liability structure is probably better, and the main limited liability structures that we set up are charitable incorporated organizations or CIO's and charitable companies.

Tim

Quite an interesting point really that I've talked in my example about purely cash going in but of course charities can do other things as well can't they so that liability point is key.

Alyssa

That's right so you can transfer cash shares a variety of different assets.

Tim

So those structures will help with the sort of administrative side of the charity, but I suppose it's pretty worth bearing in mind that the client's charitable aims are it might be quite broad and they might want to do a mixture of different sorts of charitable giving be it some to an existing charity would be some to a daf somewhere between their own charity and an already established charity so I suppose clients may want to use more than one and because they go along.

Alyssa

Exactly and sometimes it's not a choice of of one or the other you might decide to set up your own charity but also make donations to existing charities or also make donations to a donor-advised fund so it's not one choice rather than the others you can use them together as well.

Guy, Senior Associate, Burges Salmon LLP

I mean I've seen it in the context of where a family or an individual is at the start of their philanthropic journey they have used a donor advised fund because it gives them a slightly more flexibility but the setup costs or ongoing costs for that are relatively small and then once they've got a better idea of who they want to benefit and how they want to benefit then they can take the next step to create and then fund their own charitable vehicle and that works quite well as a staged process to help those individuals decide what they want to do and how they want to do it.

Alyssa

That's a great example and quite popular in families where sort of the younger generation is starting to get involved and looking for ways to get involved and familiar with the decision making and the liabilities that go along with it.

Guy

So in terms of those practical steps then Alyssa if the client is um has made the decision to set up their own structure what are the first things they need to think about in getting started.

Alyssa

So once they've taken advice on the type of structure the next step would be to prepare the governing document so in the case of a charitable trust that would be a trustee for a charitable incorporated organization that's a a constitution which is based on a model prepared by the charity commission and for a charitable company that would be articles of association that then need to be registered with companies house, and those documents will be the rule book for the charity and we can advise on the specific clauses that need to be included as well as the most important clause which is the objects clause that sets out what the charity is set up to do and who it is to support and in order to be registered with the commission it has to be established for exclusively charitable purposes and satisfy the public benefit test so that that can require some thought.

Tim

And so I think at this stage it would probably be helpful for listeners if we just explain what the charity commission is and what's its role and function and how it can affect private clients.

Alyssa

So the charity commission is responsible for regulating charities in England and Wales and they will get involved in the process early on if if you are registering a charity the application goes to the charity commission a case worker will review it they might raise queries or ask for changes to the objects to ensure that it is exclusively charitable, and once a charity is registered you might see the commission getting involved if the trustees would like to make some changes that they don't have the powers to do under their governing documents so one common example is if the trustees of the charity would like to change the objects in some way if they don't have the power to do that themselves then the commission would need to consent to a change and also to do with winding up of the charity so once you make a donation to a charity the assets of the charity must be applied for charitable purposes you couldn't then decide to wind the charity up and go on a fantastic holiday you would have to apply those funds either to another charity that had similar objects um and most charities will have a clause to that extent and if they don't the trustees would need to go to the commission to ask for consent to merge or transfer assets to another similar charity.

Guy

So where you have a charity that's run in the quotes correct way you can expect quite a lot of dialogue between the charity and the charity commission both set up but there's an ongoing compliance reporting element there that everyone involved with the charity is going to have to comply with.

Alyssa

That's right and it's sort of the ongoing compliance obligations really depend on the type of entity that you choose, that's where we come in because it may be that if the trustees are our time poor and want to make an impact one entity may be preferable to the other because it has less reporting obligations so one example is that a CIO is regulated by the charity commission alone whereas a charitable company is regulated by both the charity commission and companies house so in that case annual reports returns those sorts of documents would need to be provided to both regulators which is sort of a dual administration burden it's also quite key that you have your governing documents set up correctly at the beginning because if you provide for flexibility for the future you won't need to go to the charity commission as often to ask their consent to make changes which can mean that you're much more efficient in running your charity you've set yourself up well for the future because you've provided some wiggle room if your focus changes slightly.

Guy

And also as to your final point you made previously once you've given the money away to the charitable vehicle that is it, it is to be used for charitable purposes so there's before you get started you need to identify how much you can afford to give away and make sure you're happy with that, because getting it back to fund your next holiday home or other family expenses is not going to be possible.

Tim

So once the charity set up it is going to have to pursue its charitable objects and make decisions within that framework and presumably that's done through a group of individuals in each case is there a difference between how those individuals operate as between the different structures you've described.

Alyssa

There is so in the case of a charitable trust the trustees make decisions unanimously, the decision making is slightly different for a CIO or a CLG , with a CIO there are two models one is similar to a charitable trust where the the trustees are responsible for running the charity and so they are the members and directors of the CIO so they're responsible for making day-to-day decisions and also decisions of more significance like when to wind up the CIO and it's the same for a charitable company where you have members that are similar to shareholders even though in most cases the company will be limited by guarantee so there aren't shares but you have that layer of oversight and the check and balance where the people who are the members are different than the directors and in some cases you can have informal membership as well if you are um benefiting a certain community you might invite people from that community to come to meetings and provide their views there's quite a few different arrangements and it really depends on the activities of the charity and who it's set up to benefit there's quite a bit of flexibility there.

Tim

So supposedly the involvement of these um stakeholders who are maybe potential beneficiaries of the charity can be quite valuable in ensuring the charity is doing you know the right thing for that community or for those people but I suppose the in that instance the ultimate control still rests with the board but maybe better informed by information from those from those stakeholders.

Alyssa

That's right the decision making powers would stay with the directors or trustees for most decisions and then the governing document would set out where input is allowed from other people and it really just depends on a case-by-case basis but the simplest model would be a charitable trust where the trustees make decisions together and then it can be more complex than that if needed.

Tim

So the makeup of that board of directors this is presumably quite flexible, would you typically just have family members or would professionals get involved or charity specialists of some sort.

Alyssa

It's a combination so with charitable trusts sometimes the trustees will all be family members, we tend to suggest having one or two independent trustees the charity commission recommends that is as best practice because it shows that there's just some external sort of viewpoints and in relation to CIO's and CLG's which are companies limited by guarantee you can have a mix again so you might have sort of professionals directors charity advisors family members specialists in the area that the charity is is hoping to operate the main thing is to have a variety of different backgrounds and viewpoints.

Tim

So it wouldn't be an episode of death and taxes if we didn't talk about tax at some point so Alyssa there are presumably tax advantages for the charity but there are also advantages for the donors to charities as well could you talk a little bit about that please.

Alyssa

Of course charities are generally not subject to income tax capital gains tax inheritance tax or corporation tax if it's a company, and donations by individuals can also benefit from tax relief which is gift aid provided they've paid sufficient tax in the UK so that effectively increases the value of the donation for the charity and then if the donor is a higher or additional rate taxpayer they can receive tax relief on top of that, so in addition to the benefits to the charity advice can be taken before the donation is made to optimize the donor's position and sometimes we'll see there's quite a difference if the donor gifts cash versus shares or another asset whether they sell them first and gift the money that can change the position quite a bit.

Tim

So alongside thinking carefully about your structure you need to take advice on whether there are advantages to be had in um for both you and the chari, of course, so inputting different assets into the entity.

Guy

So listen coming back to the aim of today's pod, when it comes to private clients what are the takeaway points for them as to how they achieve their philanthropic aims.

Alyssa

and so in conclusion the main points to consider are first what do you want the charity to achieve, second what is the ideal structure to achieve those aims, third how will the charity be funded, four how will the decisions be made and by whom and together all of these factors will help you to create an entity that will have the impact that you're looking to create. So in conclusion the thin points to consider are first what do you want the charity to achieve, second what is the ideal structure to achieve those aims, third how will the charity be funded, four how will the decisions be made and by whom and together all of these factors will help you to create an entity that will have the impact that you're looking to create.

Guy

Thanks again for listening to death and taxes, a private client podcast from Burges Salmon. You can find out more about Burges Salmon and our team at Burges-Salmon.com, or on our LinkedIn page. In next week's episode we will be discussing how partnerships work and where they can go wrong, so don't forget to subscribe to listen to all episodes from seasons 1 and 2.

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