August 05, 2022

Article

Have you decided you want to start a charity?

That’s fantastic news – well done and congratulations for wanting to create a legacy.

However, there are things to think about. Running a charity of any size can be a responsibility and the Charity Commission expect charities to be run well.

If you want to set up your own charitable foundation, there are pros and cons to consider:

Pros

  • Charities do not pay income/corporation tax (in most cases). They also do not pay Capital Gains Tax or Stamp Duty.
  • Gifts to charities are usually free of inheritance tax for individuals.
  • Gifts to charity can reduce the income tax liability of the individual (or corporation tax liability of the company depending on the donor).
  • Charities can claim gift aid on donations made by private individuals as long as the donation is not in exchange for goods or services.
  • Charities can get special VAT treatment in some circumstances. They are no, however, exempt from VAT (as many people think).
  • Charities that occupy buildings pay no more than 20% of normal business rates on buildings that they use and occupy to further their charitable purpose.
  • Charities are often able to raise funds from the public, grant-making trusts and local government more easily than non-charitable bodies.

Cons

  • A charity must have exclusively charitable purposes, which can limit its ability to trade.
  • Trustees cannot receive financial benefits, unless authorised by the governing document of the charity and the Charity Commission authorise it. Financial benefits include salaries, services, or the awarding of business contracts to a trustee’s own business from the charity. This restriction can also apply to spouses, relatives or partners of a trustee.
  • Trustees must always act in the best interest of the charity and need to avoid situations where charitable and personal interests conflict.
  • Charity law imposes financial reporting obligations – these vary with the size of the charity.
  • Political and campaigning activities are restricted for charities.

Whilst setting up a charity is the first route people think of, there are other options available, including donating directly to a charity and using a donor-advised fund. Donor-advised funds are funds managed by a charitable entity - such as a community foundation. This route has the advantage of the tax benefits, without the restriction of the governance, which can be attractive to some people. Others find that they would prefer the freedom to run their own charitable foundation.

If you’re interested in setting up a charity or talking in more detail about the options available, please get in touch.

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