Charitable trusts

What is a charitable trust?

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

The trust is governed by a trust deed (see ‘How does it work?’ section) which includes the charitable purposes that the trust will work within.

You do not need a large amount of money to set up a simple personal charitable trust. Often, the first endowment is a lump sum from a bonus, an inheritance or the sale of shares. But because a charitable trust is a charity, it can receive money tax-free using individuals">Gift Aid or payroll giving. So 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.

What are the advantages?

Setting up your own trust provides a framework for planning your charitable giving in a systematic and thoughtful way. It may also give you a greater say in how the money you give is directed to the causes you want to support.

You can choose what to call your trust, so it can carry your family name or that of someone you want to honour, or be totally anonymous. By giving it a personal name, you can give your charitable giving an identity, which can be as flexible as you want. You don't have to include the word 'trust' in the title. You can call it a 'foundation' or 'charity' or any similar term.

Many people involve their family, or friends and colleagues, as trustees and find it an enjoyable and constructive way of developing a shared commitment to giving.

You and the other trustees can decide independently exactly how much you would like each beneficiary to receive. It is simple for them and for you. Your main responsibility is to work within the charitable purposes and the powers set out in the trust deed that governs the trust.

The trust will be able to take advantage of many tax benefits. Apart from the tax relief on your own donations to the trust, it will not pay tax on its investment income. It will not pay corporation tax or inheritance tax, or business rates (there is mandatory relief against business rates at 80% and a further 20% on a discretionary basis) if it eventually runs its own office. Also the trust will not have to register for VAT, unless it is supplying a significant amount of products or services that are subject to VAT. This is unlikely if it is simply making grants to other charitable organisations.

If you are employed, and your employer has a scheme where they will match your donations to charity, for example through payroll giving, you may be able to take advantage of this to make your trust even larger.

The only outside supervision comes from the Charity Commission for England and Wales, the Office of the Scottish Charity Regulator or, from late 2008, the Northern Ireland Charity Commission. Once the trust has been registered it must publish a formal annual report and accounts which should include a list of any grants made to organisations and report any significant changes to the trust. These reports are sent to the appropriate supervisory body. This involves some paperwork but is generally not a huge burden. As long as the trust stays within its own rules and is properly administered, the regulators generally cannot tell the trustees what to do.

The trust can continue after your death, and may be the beneficiary of a legacy from your estate which will also be tax-free. The trustees will continue to distribute funds according to the guidelines set out in your constitution. This way you can make sure that your favourite causes continue to benefit.

How does it work?

There are several ways of setting up a trust, but the basic model needs:

• 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); and
• 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.

The charitable purposes, or aims, 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 and allow the areas of interest to develop over time, 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, which include relieving poverty, promoting education or religion, or helping the community in many other ways. Guidance on the definitions of public benefit can be found on the regulators’ websites.

Within the charitable purposes, a trust can help organisations or individuals. It can operate anywhere in the world unless you have decided in your charitable purposes to restrict it to the UK or a particular geographical area.

The trust deed is the constitution of the charitable trust. It sets out the framework within which the trustees must operate. Apart from describing the charitable purposes the trust has been set up for (which can be general), a trust deed will generally describe:

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

Setting up a charitable trust can be very rewarding and relatively easy. It will need some effort and help at the start and in terms of running costs, which can be paid for out of the trust's own income. Usually your lawyer or accountant will manage all of that, for a fee. Running costs are generally not high, but some trusts have eventually become large enough to make it worthwhile or necessary to employ their own professional staff.

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.

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.

Recommended resources

• Association of Charitable Foundations
• Charity Commission for England and Wales   
• trust deeds">Simple model trust deeds
• Coutts Trust and Charity Investment Services
• Office of the Scottish Charity Regulator
• Northern Ireland Charity Commission (from late 2008)

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A version of this article, written by Theresa Lloyd, was first published in A Guide to Giving (2003).