Charitable trusts are established specifically for a charitable purpose, and attract favourable tax treatment. A charitable purpose is a purpose that is of value and importance to the community at large.
The primary legislation relating to charities law is the Charities Act 2011, and charities in England and Wales are regulated by the Charities Commission.
What is a charitable purpose?
For the purposes of the law of England and Wales, a charitable purpose includes a purpose which is for the public benefit, and falls within the following categories:
- The prevention or relief of poverty
- The advancement of religion
- The advancement of education
- The advancement of health or the saving of lives
- The advancement of citizenship or community development
- The advancement of the arts, culture, heritage or science
- The advancement of amateur sport
- The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
- The advancement of environmental protection or improvement
- The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
- The advancement of animal welfare
- The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services
- Any other purposes recognised as charitable under existing charity law, including facilities for recreation or other leisure-time occupation, if the facilities are provided in the interests of social welfare
- Any purposes that may reasonably be regarded as analogous to, or within the spirit of, a purpose falling within heads 1-13 (above)
- Any purposes that may reasonably be regarded as analogous to, or within the spirit of, a purpose which has been recognised under 14 (above)
A gift creating the charitable trust must be charitable, falling within one or more of the headings above; and have a necessary element of public benefit.
What does ‘public benefit’ mean?
There are two elements to this: the charitable purpose must have an identifiable benefit, and secondly, that benefit must be available to a sufficient section of the public. It is for the court to determine whether a particular purpose is charitable.
How is a charitable trust formed?
A charitable trust is usually created by a trust deed for charitable purposes in relation to specified assets. Precise words showing the creation of a trust need be used, but there is no necessity for the word ‘trust’ to actually be used.
Charity law does not require there to be a human beneficiary for the trust to be enforced. This is a departure from the original principle need for certainty of beneficiary. In that respect, individuals who may benefit under a charitable trust have no right to enforce it – the trust is for the benefit of the public at large. Therefore, charitable trusts are enforced by the Attorney-General in the name of the Crown.
The amount of the gift must be ascertained with sufficient certainty for the gift to be valid, otherwise the gift (and therefore the trust) fails.
What are the benefits of a charitable trust?
The rules relating to the creation of charitable trusts are more relaxed that those applicable to non-charitable purpose trusts. The main advantages are the significant tax benefits. Charities are exempt from income tax, provided that the income is applied for charitable purposes only. Therefore, tax paid or credited prior to the payment of interest may be recovered from HM Customs and Excise.
There are also important provisions for ‘Gift Aid’ donations, allowing for tax relief if the donation is a qualifying one under the Income Tax Act 2007. Donors under Gift Aid must give an appropriate declaration to enable the charity to reclaim the income tax paid.
Gifts to charities out of a deceased estate are also exempt from inheritance tax, thereby encouraging members of the public to leave charitable legacies in their wills.
A further benefit is that there is no requirement for the object/s of the trust to be certain. Therefore, a trust stated to be for “charitable purposes” will be valid. However, the objects of the trust must be exclusively charitable. Further, the purpose provided must have sufficient certainty so that the court can control the application of the assets.
Charitable trusts may also be perpetual, as the purpose of many charitable trusts could be seen as almost impossible to accomplish. Therefore, in contrast with other trusts, charitable gifts will not be void if the specified period is longer than the perpetuity period.
What are the duties of charitable trustees?
The trustees’ duties are similar to those of non-charitable purpose trusts. The primary duty is to execute the trust in accordance with its terms in the interests of the beneficiaries prescribed.