Understanding Charitable Trusts and Their Tax Treatment
Increasingly, individuals are turning to charities for vital support in times of need where their needs are not met by government services due to cost. Food bank charities are a prime example. This article is particularly relevant to the CII’s AF1 and J02 exams.
This article is correct as at 15 August 2023.
Regulation of Charitable Trusts
Charitable trusts in the UK are governed by the Charities Act 2011 and regulated by the Charity Commission. To be considered a charity, an organisation must:
- have exclusively charitable purposes; and
- be established for the public benefit.
The Charity Commission is responsible for maintaining the public register of charities and ensuring that they meet the legal requirements for charitable status.
Differences Between Charitable Trusts and Non-Charitable Trusts
It’s worth being aware of the ways in which charitable and non-charitable trusts differ:
- A charitable trust cannot be void for uncertainty – the ‘three certainties’ do not apply.
- A charitable trust can continue indefinitely and can be varied if it becomes obsolete.
- There is a restriction on accumulating income. This is for the life of the settlor, to a maximum of 21 years, unless the court or the Charity Commission state otherwise.
- If the purpose of the trust becomes impossible to fulfil, then the trust property can be passed along to a different charitable trust which has the same or very similar purpose. This is known as the cy-près doctrine.
Taxation of Charitable Trusts
To encourage donations, charitable trusts and the gifts made into them benefit from special tax treatment:
|A charitable trust is exempt from Income Tax.
|Where contributions are made by an individual during their lifetime via gift aid and / or payroll giving, they will benefit from Income Tax relief.
|Capital Gains Tax
|A charitable trust is exempt from Capital Gains Tax.
|Gifts from individuals to charities during their lifetime are exempt from Capital Gains Tax.
|Lifetime gifts from individuals are exempt from Inheritance Tax.
In addition, where 10% or more of an individual’s net estate is left to charity, the rate of Inheritance Tax payable on their estate reduces from 40% to 36%.
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