The options for business people wanting to get involved in charity are plentiful, says Peter Baber.
Business people, and not just those in Yorkshire, are more than used to charities approaching them for money.
But in the next few months those clamours are likely to get louder as a much-used tax break many charities have benefited from is significantly tightened.
Gordon Brown’s unexpected lowering of the basic rate of tax two years ago in his final budget as Chancellor was, at least initially, greeted with whoops of joy by everybody – except the charity sector, because a drop in the basic rate of income tax would also by definition entail a drop in the amount of money charities could claw back as Gift Aid. In response to the subsequent outcry the Treasury managed to work out a system that effectively put the change off for two years, but that period comes to an end in April 2010, and the lower rate will apply.
Suzy Harris-Milnes, private client senior tax manager at Grant Thornton in Sheffield, says it is not surprising that charities have taken Gift Aid so seriously when you consider that the scheme in full means you effectively get two bites of the tax-free cherry: as well as the charity, the person giving the money away can claim relief, too.
“This means, that, for example, if you want to put £1m into a charitable trust, it will only cost you £600,000,” she says, “while the trust in the past would get an extra £280,000. After April 2010 they will only be able to claw back an extra £250,000: for many charities £30,000 is a lot of money.”
So it’s not surprising that charities will need to start looking again at sources of funding. The good news is that, in Britain at least, they could be knocking at an open door.
“I feel we are going back to our Victorian principles,” says Adam Waller, head of the private client team at Deloitte in Leeds. “People feel they have to give something back to society.”
Many people view the US, with its Carnegies and Rockefellers, as the country where philanthropy started and remains strongest. The UK-based Institute for Philanthropy says this is still the case. “It’s only because they have a more developed way of giving,” says Musa Okwonga, director of communications. In the US, for example, it is possible to make a gift in which you retain an interest – something strictly forbidden in the UK.
But the UK remains the second most philanthropic country in the world, well ahead of its European neighbours, and Okwonga says that, if anything, the gap between us and the US is narrowing. “There has been a sharp increase in the sums pledged to charity by the UK’s 30 biggest donors,” he says, “from £333m three years ago to £1.2bn last year.”
Pervinder Kaur, partner in the private capital group at Addleshaw Goddard, says what’s even more surprising is that this appetite for giving does not appear to have tailed off as a result of the credit crunch. “I expected it would tail off with our economic troubles,” she says, “but I am surprised at how many clients still want to put stuff away. During the 1990s recession philanthropy did tail away.”
The reason for increased benevolence is variously given as a general increase in philanthropic feeling, the impact of generation Y, and, most commonly, the fact that more wealthy individuals will have made their wealth themselves these days rather than inherited it. An undeniable fact: only 23 of the 100 people in Insider’s rich list for 2008, due out in our October issue, have inherited family money.
Martin Pickering, a private client director in PricewaterhouseCooper’s Hull office, says while that may be the case, it’s not necessarily a sign that those with inherited money are more miserly. “If you have made your own money you probably feel free to do with it as you want,” he says. “But if you have inherited it you feel it’s not really yours to give away.”
Whatever the reason, what are the options for someone newly enriched who wants to give away money? Even with the changes to Gift Aid, giving away assets directly is still popular. It doesn’t have to be just money either. You can give away quoted shares in a company and that will still benefit from tax relief, as will property, as long as you give it away completely.
For those with enough money to create a fund that can generate income, there is also the possibility of setting up a charitable trust, which can give the money on to other charities, according to rules specified by you. Sadly those second charities will not also be able to benefit from gift aid. As long as that is all it does, setting up a trust is relatively simple. You can nominate your own trustees, which would usually include one or two professionals (who will charge a nominal fee) and chosen family members.
Pickering says this set-up is even a good way to bring some sense of cohesion to a family you may feel may drift apart. “If you don’t have a family business any more to run, because it’s been sold on,” he says, “this can be a sort of business. Tthe younger generation often feel they can support it in a way they couldn’t support the original business.”
Heather Maizels, director of private banking at Barclays Wealth, says setting up a trust can give your children “the opportunity to learn financial responsibility and stewardship”.
But many an adviser will tell you that if you want to set up a charitable trust that actually does something itself – as Pickering says, “if you want to build that hospital in Soweto” – you need to think harder. Not least in terms of what liability you are going to have. Kaur says that if you are going to be involving any third party in what the charity does, then it makes more sense to set yourself up as a limited company. You can still register your organisation as a charity as well, only for the moment you have to do both separately. Legislation to make things simpler has been promised, but is still pending.
You also have to make sure your trust will have enough money for decades to come – bearing in mind that, as Waller says, the Charities Commission tends to take a conservative approach on what sorts of investments such charitable trusts are allowed to make.
And it wouldn’t be a bad idea to make sure you aren’t duplicating what’s out there. Because many people will tell you that, partly because of what Maizels describes as “the desire to brand yourself or your family in a particular way”, there are lots of charities out there. The market is ripe for consolidation.
Daniela Barone Soares, chief executive of Impetus, an organisation that advises charities, tells a comical tale of suggesting to one charity that it should merge with another, only to be met with a chorus of “Oh no, not them, we are not like them at all.” “Organisations that from a distance of five ft may have some slight differences at 100 ft start to look similar,” she says.
But many business people feel they would like to do more than just give money away. So even if they aren’t setting up their own charity, they would still like to bring some of the business acumen to the charity world, and perhaps get rid of waste like that. What options are out there for them?
Kaur says they can always try to get appointed as a trustee of an existing charity. “The Charity Commission is crying out for them,” she says. Those with a more entrepreneurial streak may prefer to get involved with Soares’ organisation, Impetus, which acts more like a venture capital company in the way it invests. It picks a select few charities and, just as in business, sets targets with them that they have to reach to deliver more.
The fund is to make its first two “exits” this year from two charities, one of whom, having been taken on a couple of years ago as a small local concern, has won £3.2m in Pathfinder money from the government to provide training. One of its trustees is Andy Hinton, who has been involved with it for just as long as he has been running the Ailsa3 enterprise fund from Yorkshire. He says he became involved “to make charities more effective”.
But are business people right to use the same assumptions they use for running a business with a charity? Soares, who used to work for BancBoston Capital, says there are similarities. “We still get them to work to key performance indicators, and with the chief executive to make sure they have the best management,” she says.
But she and Okwonga warn there are differences, particularly when it comes to trying to establish what kind of return you are getting. Because charities are not making money, they say, this is harder to measure. Okwonga also uses an argument that may sound familiar to those outside the sector. “Business people sometimes have a misconception of inefficiency in charities,” he says. “For example, they may think 10 per cent going on overheads is too much. But if you want your cause to succeed you need the best people to run it. Many of the bosses of today’s charities could be earning five to six times as much in the private sector.”
Hinton thinks what may once have been a frosty relationship between business and charity is improving. “Certain people involved in charities have been a little bit suspicious of the motives of business people wanting to get involved,” he says. “But that barrier has started to break down.”