Should I set up a charitable trust?

If you’d like to help causes close to your heart, setting up a charitable trust could be an effective way of managing your estate for the benefit of others. A charitable trust can be set up to make donations during your lifetime and as part of your inheritance when you die.

What is a charitable trust?

A charitable trust is a legal arrangement that allows you to allocate assets to support charitable causes, while potentially receiving tax benefits and providing for your own financial needs and your beneficiaries.

A charitable trust:

• Must be established for charitable purposes, which are defined by law.
• Must be managed by trustees, who are responsible for investing the trust assets and distributing the income to the beneficiaries.
• Is irrevocable, meaning assets transferred to the trust cannot be returned to you or your beneficiaries.

What are the benefits of a charitable trust?

• Legacy: The charitable trust can create a lasting legacy by supporting charitable causes you care about
• Tax benefits: As part of your wider financial plan, a charitable trust might aid tax planning as you may be able to qualify for a reduced rate of IHT, though this depends on the level of funds transferred to the trust

Making charitable donations

A charitable trust can be seen as an investment strategy set by you, ensuring your chosen charities receive the money you want to gift hassle-free.

You might select to apply a restriction on how money is used and when – these are all things that can be planned well ahead of the donation in order to ensure your wishes are carried out and maximise the benefit to the causes you want to support.

For example, a donor with £5m who wanted to give it to 10 small charities could set up a charitable trust to give each of them £500,000. However rather than this being a lump sum, the charitable trust can, for example, give each £20,000 per year for 25 years.

This prevents small charities, that may have few resources, from struggling to manage large donations.

Tax considerations and charitable trusts

There are several tax considerations that, if managed correctly, could result in more money going to charity rather than HMRC.

From an Inheritance Tax (IHT) point of view, any gift you give directly to charity, including through a charitable trust, is exempt from IHT. Also, under certain circumstances, your donation to charity could qualify the remainder of your estate to a reduced rate of IHT at 36%.

Charitable trusts require careful planning and, depending on your circumstances, can be a complex area of financial planning to navigate, but once they are in place are a powerful vehicle that can ensure your charitable objectives are met.