The UK has a long history of philanthropic activity. Indeed, the tradition of giving dates back to medieval times and the concept of charitable tax relief is as old as the concept of income tax itself. With the rise in global mobility of high-net-worth individuals and a greater focus on transparency, the UK has continued to be attractive as an international philanthropic centre. The Charity Commission provides charities with a reputable regulatory environment and charitable tax reliefs are available to both charities and donors. There is, nevertheless, a certain (and increasing) degree of administration, formality and disclosure involved with establishing and maintaining an English charitable structure.
For many high-net-worth philanthropists considering charitable structures, the required administration, formality and disclosures are entirely acceptable, given the benefits that English charitable status brings. For others, however, especially those for whom privacy is paramount, there are real concerns. The required public disclosures of both charity and trustee details on the Charity Commission website including (in the majority of cases) the public filing of accounts reveal information that some philanthropists would rather keep private. It is extremely difficult for a philanthropist who wishes to retain anonymity or limit public disclosures to do this whilst establishing an English charitable foundation, or indeed, making large gifts directly to English registered charities. What then, are the options for these individuals?
Tax Reliefs Impact on Philanthropic Structuring
Before considering the role that offshore jurisdictions might have to offer in this respect, it is necessary to consider charitable tax reliefs. The availability of charitable tax reliefs will necessarily shape the form that charitable structuring takes for many international philanthropists. Whilst these reliefs will generally not be the main driver for giving, donors do usually want to utilise available reliefs, either to reduce the cost of their giving or to increase the amount of the gift available to the recipient. However, due in large part to differing concepts of what is charitable across different jurisdictions, if a philanthropist wants to obtain tax relief in a particular jurisdiction, usually he or she must give to a charity established in that jurisdiction itself.
In Europe, this remains substantially the case despite changes to legislation following the European Court of Justice (ECJ) case of Hein Persche v Finanzamt Lüdenscheid in which the ECJ held that restrictions to cross-border giving (through the availability of tax reliefs) were contrary to the principles of free movement of capital and freedom of establishment across member states set out in the EU treaty.
As a result of this decision, changes were introduced by the Finance Act 2010 to the meaning of ’charity’ for most tax purposes in the UK, so that it could extend to qualifying organisations within the EU, Norway and Iceland. In July 2014, this definition was extended to also cover organisations in Liechtenstein. This means that, in theory, UK taxpayers can claim tax relief on donations to qualifying organisations and those qualifying organisations can claim charity tax reliefs and exemptions within the UK. In practice, however, the availability and uptake of cross-border tax relief, which requires registration with HMRC by eligible organisations (whose purposes must be consistent with charitable purposes under English law), has been limited. By mid-2015, we understand that 142 organisations outside UK jurisdiction had applied for recognition as qualifying organisations under the provisions of the Finance Act 2010. Of these, only 11 were successful in their application. It is not yet clear what the effect of Brexit will be on these provisions and, perhaps, whether these concessions remain will depend on the nature of Brexit itself.
Accordingly whilst the UK offers certain tax reliefs and exemptions to charities and to donors, and whilst English charities have significant freedom to operate overseas (such that an international philanthropist can channel their worldwide giving through an English charity),the possibilities for the use of non-UK charitable or philanthropic structures continue to be limited where UK charitable tax reliefs are important.
Regardless of the Brexit uncertainty, it is also worth mentioning the case of Routier & Another v HM Revenue and Customs.[i] An appeal heard in the Supreme Court on 2 and 3 April 2019 concerns the eligibility of a gift to a Jersey-based charity for the UK inheritance tax exemption. Mrs Coulter died in Jersey in 2007, and by her will she left her residuary estate in the UK on trust for either the building of homes for the elderly of the parish, or to an organisation called Jersey Hospice Care. Her will was governed by the law of Jersey. Her executors considered that the gift should be exempted from inheritance tax under s. 23 of the Inheritance Tax Act 1984 as it was for charitable purposes. HMRC, however, disagreed and determined that the gift was liable to inheritance tax of approximately £600,000. The executors appealed this decision to the High Court, but the first-instance judge found in favour of HMRC. It was held that for the exemption to apply required not only that the gift be for charitable purposes under the law of the UK, but also that the relevant trust be subject to the jurisdiction of a UK court (which was not the case for Mrs Coulter’s trust).
The executors appealed again, and this time were given permission to argue, additionally, that such a construction of s.23 constituted an unlawful restriction on the free movement of capital between Member States and third countries within the meaning of Article 63 of the Treaty of the Functioning of the European Union. The arguments were unsuccessful before the Court of Appeal but were appealed to the Supreme Court. It is not clear when the Supreme Court’s judgment will be handed down (it was not available at the time of writing) but a judgment in the executors’ favour would increase the possibilities for tax relief on cross-border gifts to some offshore charities.
Absent additional options becoming available as a result of a favourable judgment for the executors in Routier, or the possibility of making a gift to an overseas charity registered with HMRC, the solution for cross-border giving (where UK tax relief is important) lies with donor advised funds. A donor advised fund (known as a DAF) is a stand-alone English registered charity in which a donor has an ‘account’. A donor’s contributions to his account are effectively donations to the charity and so are eligible for charitable tax reliefs. Technically, once the contributions have been made, these funds belong to the charity and the donor may only make recommendations as to how these funds are distributed. In practice, however, and provided a donor’s recommendations are charitable, they will normally be followed. The use of a DAF facilitates cross-border giving, allowing a donor to obtain tax relief on gifts to offshore charities and organisations for English charitable purposes through the DAF where they would otherwise be unavailable.
A DAF is also a useful vehicle for those philanthropists who value their privacy;l a DAF permits a donor to make donations anonymously and requires few disclosures, except with regard to the required due diligence associated with account opening with the DAF itself. Many DAFs will also hold offshore bank accounts permitting non-UK domiciled donors to make a charitable donation to their account without bringing funds onshore (and hence triggering a remittance).
Stable Regulatory Environment
Tax reliefs aside, what are high-net-worth philanthropists seeking in their donations or structuring? Again, looking to England, notwithstanding recent criticism and scrutiny, the Charity Commission provides charities with a reputable and stable regulatory environment, whilst recent developments have brought more flexibility to the sector, including in the introduction of a statutory power to make social investments and the development of innovative social investment schemes.
For international philanthropists, these elements of both stable regulation and flexibility can be important. There is a desire to ensure that funds donated to charitable and philanthropic causes are employed as effectively as possible and, of course, for the means for which they were given. Accountability and oversight are valued. There is also a real desire to work more innovatively. This innovation may come in the form of venture philanthropy, social investment and/or knowledge building advocacy and it demands flexibility. It may also come in the form of coalition building.
There is an increasing desire to work collaboratively so as to pool resources to make systemic changes in society and the appetite of potential partners to do this will depend, in part, on a degree of comfort about the environment in which an individual or organisation is operating. If these important regulatory safeguards can be combined with maintaining a degree of privacy and limited public disclosures, then a jurisdiction will be particularly attractive as an option for philanthropic structuring.
So, whatever the place of charitable tax reliefs, the more overseas options for philanthropic structuring overseen by respected and flexible regulators, the better. Recent developments around the regulation of charities in offshore jurisdictions, particularly those which strike a balance between transparency, a reputable and stable regulatory environment, and both flexibility and privacy are therefore to be welcomed.
[i] [Routier & Anor v Revenue & Customs  EWCA Civ 938]
Clarissa Lyons is a Senior Solicitor at Macfarlanes LLP, UK. Clarissa advises UK and international charities, not for profit organisations and philanthropists (both individual and corporate) on a wide range of charity law and philanthropy issues.