Charitable trusts

A charitable trust or foundation is a legal organisation which can be set up by anyone who has decided to set aside some of their assets or income for charitable causes. They are registered charities.

A charitable trust may be suitable if you want to give regularly to a number of causes, if you want to give a reasonable amount as a one-off gift from time to time, or if you want to ask others to contribute to the trust’s funds. Setting up your own trust provides a framework for planning your charitable giving in a systematic and thoughtful way.

Read more about Charitable trusts

Setting up a trust
To set up a trust, you will need;

  • a donor or 'settlor', which may be you, your family or business;
  • trustees, who could be you and members of your family, as well as someone outside the family such as your lawyer or a family friend;
  • charitable purposes, which set out the type of causes the trust can support;
  • a trust deed (which forms the trust's constitution).

The trustees hold and control the trust's assets. They decide how the income and capital (assets) of the trust should be distributed, and make sure that this is in line with the charitable purposes of the trust. Many people involve their family, or friends and colleagues and find it an enjoyable and constructive way of developing a shared commitment to giving. After the founder’s death, the trustees will continue to distribute funds according to the guidelines set out in your constitution, and in this way you can make sure that your favourite causes continue to benefit.

The charitable purposes form part of the trust deed and describe the sort of causes that the trust can support. These can be worded in quite a general way so the trustees can keep their options open, or they can be very specific to ensure that the funds are distributed for the purpose intended by the donor. The charitable purposes must be for public benefit within the purposes that the law regards as charitable (guidance on public benefit can be found on the regulators’ websites).

The trust deed is the constitution of the charitable trust. It sets out the framework within which the trustees must operate. A trust deed will generally describe:

  • the powers and responsibilities of trustees;
  • how they are appointed and removed;
  • the approach to investment;
  • how the constitution (but usually not the charitable purposes) can be altered;
  • what will happen after the death of the settlor.

The Charity Commission has a set of simple model trust deeds available on their website as a good example of what you will need to think about (link).

Tax efficiency
Because a charitable trust is a charity, it can receive money tax-free using Gift Aid or payroll giving. If you are employed, and your employer has a scheme where they will match your donations to charity, you may be able to take advantage of this to make your trust even larger. The trust can continue after your death, and may be the beneficiary of a legacy from your estate which will also be tax-free. See lifetime and legacy giving.

Apart from the tax relief on your own donations, the trust will not pay tax on its investment income. It will not pay corporation tax or inheritance tax. If it eventually runs its own office, the trust will not need to pay business rates (there is mandatory relief against business rates at 80% and a further 20% on a discretionary basis). Also the trust is unlikely to have to register for VAT.

Running a trust
Setting up a charitable trust is relatively easy but you may need some help at the start. Running costs can be paid for out of the trust's income. If there is a significant lump sum, there may also be investment management fees to ensure the best return on your investment. Running costs are generally not high, but some trusts are large enough to make it necessary to employ their own staff.

It is not possible to give an exact estimate of set up or running costs but, as a guideline only, if you ask your lawyer to help you to set up a simple trust, it might cost up to £1,500 plus VAT. Also, yearly fees from your accountant might be up to £1,000 plus VAT. If there is a significant lump sum, there may also be investment management fees to ensure the best return on your investment.

As legally registered charities, trusts are subject to the charity regulators, such as the Charity Commision for England and Wales, the Office of the Scottish Charity Regulator or the Northern Ireland Charity Commission. Registered trusts need to submit formal annual report and accounts to the appropriate regulator, but as long as the trust stays within its own rules and is properly administered, the regulators will leave trustees to run the trust as they see fit.

A version of this article, written by the Association of Charitable Foundations (ACF), was published in a previous edition of A Guide to Giving (2008). 

Glossary: charitable trust, foundation