Philanthropy is not the sinister tax dodge the Left would have you believe

Telegraph

11-05-2025

Can charitable giving be a means to avoid tax? Whenever a story of some very rich person making a large donation is in the news, the sneering refrain of it being a tax write-off will soon be heard.
The reality is that charitable giving does not work as a method of avoiding tax – or rather, it can indeed reduce your tax bill to zero, but at a cost that is under the most advantageous circumstances more than double what the tax liability would have been.
How the rich use charitable donations to reduce their tax bills is rich fodder for Guardian columnists, but it has been a much hotter political issue for much longer on the other side of the Atlantic. In the United States it has fuelled progressive outrage for over a century. American philanthropy is on a much grander scale than ours.
In 2023, charitable giving in the US is estimated to have totalled $557bn (£420bn). According to the Charities Aid Foundation (CAF), last year the UK public donated £15.4bn. Americans gave roughly 27 times more than Britons, while its population is only six times larger. If we were as generous per head of population, we would be giving around £70bn to charity every year.
The US is much richer than us, and that gap is growing. But that can only be part of the story for such a large divergence.
A popular explanation is that the US tax system treats donations more generously than that of the UK. But the problem with that argument is that it doesn't – our system is just more complex. In fact, as UK taxes are considerably higher (certainly if only US federal taxes are taken into account), our tax relief is also higher. Admittedly, our more complex rules will mean that a lower proportion of relief that is due will actually be claimed.
For a higher rate taxpayer to donate £1,000 to charity, the net cost to them will be £600 and for an additional rate payer – someone earning over £125,140 – £550. Those wishing to give £1,000 to their chosen cause must make a payment of £800. Then the charity claims £200 from HMRC in Gift Aid, ie the 20pc basic rate tax paid on the gross amount. The donor can then declare the gift on their annual return, avoiding any higher or additional rate tax on that £1,000.
There is a good reason why the UK has Gift Aid rather than the more straightforward US system of simply declaring donations on one's annual tax return to get the relief. In the United States all taxpayers are obliged to file a tax return; in the UK most people on PAYE without outside earnings don't have to.
When donations are made to family charitable trusts, rather than what are generally understood as charities, the story becomes more intriguing. The donor will not lose full control of the funds. Set up a charitable trust with your nearest and dearest on the board, then donate £1m. HMRC will top this up with £250,000 and your tax bill will go down by £312,500 (as surely anyone who can afford to donate £1m will be an additional rate taxpayer). The same effect can be had for those with smaller sums to spare or those who don't want to go to the hassle of establishing their own charity by setting up a donor account with CAF or other charitable entities who provide this service.
Under both arrangements, the funds don't need to be distributed straight away to deserving causes. But such trusts cannot simply be used to accumulate tax-free funds. In America the rules are complex, but broadly speaking 5pc of a foundation's funds need to be distributed each year. The UK guidelines are rather less rigid, but the same general principle applies.
A family charitable trust's board, or in truth often the person who set it up, can still direct how its funds are invested. These decisions do need to be made in the interests of the charity, not those of the donor – but this should usually not be too onerous a requirement. The appeal of such an arrangement to plutocrats is unambiguous. They can put part of their wealth beyond the reach of the taxman while still having significant control over them.
So why is this not a tax dodge? Because once the transfer has been made the funds can only be used for charitable purposes and the money can not be called back. They can't be dipped into when a desperate desire for a new yacht arises.
One of the great success stories of British philanthropy since its founding in 1958 has been the Garfield Weston Foundation. Its donations have benefitted virtually all our great museums, art institutions and welfare charities across the country.
Its funds have an intriguing source. British Sugar, Primark (both owned by Associated British Foods) and Fortnum and Mason all, indirectly, contribute to them. Associated British Foods, with a market capitalisation of around £14.5bn, is 56.6pc owned by Wittington Investments. Fortnum is wholly owned by Wittington. Just over 20pc of Wittington benefits the billionaire Weston family. The other 79.2pc is owned by the foundation, which annually makes donations of around £100m. That is what family charitable trusts can achieve. They are not a tax dodge, but rather make Britain a better place for all of us.