It is not often that you get the chance to tell the finance profession they have missed a trick when it comes to making the most of tax breaks for their clients but in the sphere of charitable giving that seems to be the case.
Last year, the British public gave around £7.3bn to charity but simply by changing the way they give, this could have been around £900m more and given donors generous personal tax relief.
The Giving Campaign – a national initiative to boost charitable giving in the UK – is working to encourage the financial community to recognise the power they have to generate additional millions of pounds for charity, and that they can benefit.
A common misconception is that involvement with charitable giving is simply a case of “doing good” or boosting your corporate social responsibility profile. But at The Giving Campaign, our research has shown there to be a number of business benefits for promoting charitable giving to clients.
It has long been the case in the US that people structure their charitable giving with their long-term goals and financial planning, deciding how much they can afford to donate and how best to give.
Financial services professionals have become a regular component of the charitable giving process. Advice on charitable giving is seen to be the key for professionals looking to build deeper, richer client relationships, enhancing client loyalty and positioning the firm as a socially responsible organisation.
Financial advisers and product providers can benefit from advising clients on the tax implications of donations and benefit by getting involved with the emerging market of charity financial products.
The tax implications are directly relevant to 70 per cent of the population who support charities regularly. Yet, only around 18 per cent of advisers are currently discussing tax breaks with their clients compared with 90 per cent of advisers in the US.
Financial advisers are ideally positioned to encourage clients to think about the way they give and yet many are not how the various methods work.
In 2000, the Government introduced a range of tax incentives enabling charities and donors alike to benefit from tax relief on donations made through methods such as gift aid, payroll giving, share giving and legacies.
Gift aid and legacies are probably the most well known tax-effective giving methods. Around 25 per cent of donors are now using gift aid. It is a simple scheme that enables charities to claim the basic rate of income tax on gifts from UK taxpayers, boosting the value of a donation by 28 per cent. Donors who pay tax at the higher rate can reclaim the difference between basic and higher-rate tax, reclaiming 23p for every £1 donated by filling in the details on their tax form. A legacy – charitable bequest via a will – is given before tax is calculated, reducing the inheritance tax due.
Payroll giving raises £86m a year for charity and is the fastest-growing tax-effective giving scheme. As the name suggests, it is a way to support charity through the payroll. The donation is taken off the donor's gross salary, granting immediate tax relief, costing as little as £6 to make a £10 donation.
Perhaps the most generous tax relief available to individuals who give to charity applies to gifts of shares, property or land, and yet it is the least well known. People who donate shares or property can claim full income tax relief, so a higher-rate taxpayer giving £1,000 of shares to a charitable organisation would get tax relief of £400 and no capital gains tax liability would apply.
In order to provide a comprehensive advisory service to clients, it is vital to have a good understanding of the tax reliefs above. At the most basic level, advisers could reinforce this knowledge with the inclusion of some brief information on charitable giving within client fact-finds.
By including a few prompts to clients about their giving, it may be possible to extend your advisory service to a new level.
In the UK there are currently very few mainstream charity financial products – products that allow individuals to donate to charity, taking advantage of the tax reliefs. However, recent product launches by Triodos Bank, Charity Bank and Charities Aid Foundation have started the ball rolling, with a number of joint initiatives between the financial and voluntary sectors currently in development.
The growth of charity financial products would allow investors to plan and budget for their giving, taking advantage of the tax breaks. Recent NOP research suggests a high level of consumer demand for such products, with around 30 per cent of people saying they would choose to invest in a charity financial product over a regular financial product. This concept proved most popular among young and wealthy individuals, with as many as 40 per cent stating they would consider investing in this type of product.
A new report, Charity Financial Products – A New Approach to Giving, examines the potential for a mainstream charity financial product marketplace in the UK by building charitable giving into existing products and sales processes. An example would be including a box on application forms to allow a client to direct part of the proceeds of a policy on maturity to charity.
The financial industry encompasses a wide range of products and charities also vary greatly in focus and size so the report does not suggest a product ideal but instead a series of concepts that can be used as a basis for product development. Charities would pay commission to intermediaries who sell charity products in the same way as any other financial product sale.
Growth in this market would present numerous opportunities for financial organisations to generate additional product sales and to build trust by incorporating charitable giving within their product range.
There is further opportunity to build upon relationships with existing clients and to attract new, and often wealthier clients to their business. Charities would benefit from the large-scale distribution of the financial services industry.
In the past, there have perhaps been no two sectors that differ more than the financial and voluntary sector and there have been issues of distrust and cynicism about the long-term viability of cross-sector partnerships on both sides.
But, with the clear benefits outlined above, I believe there is no reason why these barriers cannot be overcome. I believe this is one of the most exciting developments and opportunities to have arisen in recent years but it will be the early movers who benefit from their involvement and who become market leaders.