Many people will, at some point in their life, want to make a charitable donation. But for those subject to tax in both the United States and the United Kingdom, it's not quite as simple as just donating your money and there are various factors you need to consider. In this article we break down charitable giving for US-UK individuals, assuming that a 'donor' is a UK resident but a US citizen.
UK tax reliefs
UK reliefs that donors will be looking to secure include:
- Inheritance Tax (IHT) relief, so that the donation does not constitute an immediately chargeable lifetime transfer for IHT purposes (and therefore attract a tax charge of 20% on the value of the gift). Gifts by UK domiciled or deemed domiciled individuals, wherever resident, directly to a US charity could give rise to such a charge.
- Capital Gains Tax (CGT) relief, such that if the assets being donated are non-cash (eg shares or land) standing at a gain, no CGT is payable.
- Income Tax relief which enables individuals to deduct the value of the net benefit to the charity from their taxable income. This applies only where 'qualifying investments' are gifted or sold at a discount.
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Gift Aid, which enables the recipient charity to claim back from HMRC the basic rate of tax paid by the donor on the cash gifted. Higher or additional rate taxpayers are also able to claim the difference between the tax paid at the higher (or additional) rate and the basic rate on the amount donated.
To obtain charitable reliefs in the UK, broadly, the donation must be made to an entity which satisfies the definition of a 'charity' under Part 1(1) Finance (No.1) Act 2010. As a result of a recent clarification, it is clear that donations must be made to a UK charity, and that donations to EU or EEA charities (or outside the EU/EEA) will not qualify for relief in the UK.
However, if an individual is also taxable in the US, they will need to ensure that they meet the requirements for charitable tax relief in the US. Since the US and UK are not fully aligned on the requirements for an entity to be charitable, a donation to a UK charity may not qualify for US charitable tax reliefs. So what are the donor's options?
Donor advised fund
Also known as a DAF for short, this is effectively an 'account' or sub-fund within a larger charitable entity. The donor makes a gift to the DAF provider, which is ringfenced; the DAF provider then applies the funds for charitable purposes in accordance with the wishes of the donor. The donor pays fees to the DAF provider for these services.
Many providers will offer DAFs that are considered and recognised as charitable for both US and UK tax purposes (although this is distinct from the standard DAF which is only charitable in the UK). A gift to such a DAF will qualify for US and UK tax reliefs in relation to the donor.
Other advantages are that the DAF provider will carry out all necessary reporting and compliance with the Charity Commission and the IRS (ie this burden will not fall on the donor as it would with a bespoke charity) as well as other administrative tasks (such as applying for Gift Aid rebates). In addition to this, onward gifts from a DAF often appear identical to gifts from a bespoke charity (ie they can be made and appear to be from 'the X family foundation') and they can be set up relatively quickly. The main downside to a DAF is that the donor may potentially have less control regarding the use of the funds since they will not be acting together with others as the 'trustees'. The donor will also have to satisfy the DAF provider that the onward use of funds is 'charitable'.
As a result, DAFs are likely to suit donors wanting to make charitable grants who would prefer less of an administrative burden. For those looking to set up and be involved in operational charities (ie charities carrying out activities other than purely grant-making activities) this will not be the optimum solution.
Dual resident charity
It may be that a bespoke charitable structure is preferred to a DAF. For example, this may be the case where the charitable activities are likely to extend beyond grant-making (eg running educational or musical programmes for disadvantaged individuals) or where the founding individuals want to take a more proactive role.
In this scenario, the recommendation would be to establish a dual resident charitable structure. This is, essentially, a US charitable corporate parent which wholly owns the shares in a UK charitable company limited by shares. The UK company would be restricted from carrying out activities or making grants which are not charitable for US purposes to avoid a conflict.
For US purposes, the UK subsidiary is treated as a foreign account of the US charity. This structure therefore allows US-UK individuals to make grants to the UK subsidiary which would qualify for relief in principle both in the US and the UK. Individuals who are solely US taxpayers can make relievable grants to the US parent, and individuals who are solely UK taxpayers can make relievable grants to the UK subsidiary.
Gifting to a 'friends of' charity
A final option, where one-off donations are being made, would be for the individual to make the gift to a 'friends of' entity in their home jurisdiction. The 'friends of' entity would then transfer the funds to the 'main' charity in the other jurisdiction. The gift by the individual would qualify for reliefs. However, not all charities have 'friends of' branches in other countries so this is not always an option.
Takeaways
A UK resident US person making charitable donations can easily fall foul of the conditions for tax relief in the UK and/or the US. If you are a US person residing in the UK and are considering making charitable gifts, or want to set up a structure to facilitate a longer-term charitable programme, we would recommend that you take expert advice to avoid inadvertently triggering a tax bill on what should otherwise be a tax neutral gift.
