UK charity donors demand transparency in return for cash

Lord Sainsbury, Sir Elton John and the singers from One Direction might not have much in common at first glance. But they are all members of a long list of wealthy UK individuals donating an ever-larger proportion of their wealth to charities.

Modern charities keen to benefit from their growing generosity will need to keep their houses in order, though. Today’s wealthy donors want to know exactly what their money will be spent on, and the proportion of their donation that will go to the cause, compared to how much is spent on administration. Raising major donations is no longer a matter of scanning the Sunday Times UK Giving List and knocking on the doors of the listed names.

“Gone are the days when donors put their hands in their pockets without asking questions,” says Alberto Lidji, chief executive of Maximum Philanthropic Benefit, a company that helps both charities and philanthropists with fundraising.

“Wealthy individuals have charities approaching them 24 hours a day, seven days a week, and the organisations that get the donations will be those that stand out.”

Government funding for charities is drying up, says Lidji, and organisations are exploring other avenues, including pitching for donations from wealthy individuals – who are donating more at a time when overall donations to charity are falling.

“As more charities chase the same pools of money, fundraisers are having to work harder,” he explains. “Charities often need to prove that they are leaner than other organisations in the same sector.”

As well as a reduction in government support, the charitable sector has also been hit by the prolonged recession. Recent reports from the Charities Aid Foundation (CAF) and the National Council for Voluntary Organisations (NCVO) reveal a year-on-year fall in donations to £9.3bn in 2011/12, from £11bn the previous year.

Total giving in the UK is about 1 per cent of GDP, but this is half the level in the US. Experts attribute this to the fact that across the Atlantic philanthropy is institutionalised, with wealthy Americans routinely giving 3.5 per cent of investable assets to charity, against 0.8 per cent for their British counterparts.

However, think-tank New Philanthropy Capital (NPC) believes the UK public would give more if organisations provided information about the things donors care about.

NPC’s report, Money for Good, recently revealed that 63 per cent of high-income donors pay close attention to how a charity proposes to use a donation. A third of wealthy donors it surveyed said they would give more money to a cause if charities did a better job in this area.

Based on the responses, NPC predicts there could be a further £665m in UK donations if charities were more transparent. It says that this is equivalent to nine times as much as the total raised by the 2013 Comic Relief Red Nose Day.

Iona Joy, head of charity effectiveness at NPC, said: “Ten years ago, very few people talked about impact measurements, they tended to focus more on moral and social values than how charities used the money. But today’s donors are taking the ‘impact measurement’ more seriously.”

Some say the shift in emphasis towards checking the impact of donations can be linked to the source of the money. Ten years ago, more than 50 per cent of UK donors had inherited their wealth. Today, that figure has fallen to 25 per cent.

Clive Cutbill, head of philanthropy at law firm Withers, says this has prompted a change in the way people give, with donors taking an informed, planned, precisely targeted and hands-on approach. “People who have made money themselves are very interested in where their money goes and they want to see more bang for their buck,” he says. “They often come from business backgrounds and care about maximising the impact their money can achieve.”

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Pilotlight, a charity offering free financial advice and support to small charities, recently revealed that more than 70 per cent of philanthropists and city executives said a personal link to a charity prompted their decision to donate, with nearly 60 per cent seeking details of the charities’ impact. “Donors now want more evidence of the impact a charity is having on the communities they serve,” said Fiona Halton, chief executive at Pilotlight.

“It’s also important that they are told how their donation contributes to the charity and makes an even bigger difference. With overall donations falling, charities need to measure their impact and talk about it to attract donations of both time and money.”

Colin Temple, managing director of Schuh, and joint founder of the charitable foundation Schuh Trust, agrees. “It’s very easy to write a cheque and give it to a big charity but I think you need to do your homework when it comes to giving. At the trust we look for small charities that may struggle for funding, but we know their project will make a real difference.”

Research from CAF shows that donors under 30 are particularly enthused about personal involvement in good causes.

According to the report, The Future Stars of Philanthropy, based on global surveys from Scorpio Partnership, it is not unusual for givers to travel to far-flung locations to experience challenges and change first hand. It is equally common to find them on organising committees or lending knowledge, network and experience as a resource for the organisations they help.

Coutts, the private bank, said it has seen a threefold increase in the number of people setting up charitable trusts over the past six years. One of its clients, who started giving money to Hope and Homes for Children, ended up visiting the charity’s operations in Rwanda to understand better what his money was being spent on.

Another client donated to the Boxing Academy, which helps young people in danger of exclusion from education. After visiting the project, he was so impressed that he funded badly-needed building renovations.

“People want to see how their money has made a difference and it is in the charities’ interest to be transparent,” says Maya Prabhu, executive director of philanthropy services at Coutts. “They are not interested in glamorous reports with lots of glossy photographs. They prefer an email with clear bullet points on what the charity has achieved.”

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Five tips for donating to charity

Cash is the most common way to give money to charity, accounting for more than half of all donations. But while the rattle of a collecting tin can be persuasive, there are far more tax-efficient ways to give, says Kate Turner, head of advice policy at Towry.

● Take advantage of inheritance tax (IHT) relief

If you leave at least 10 per cent of what is left of your estate over the £325,000 nil-rate band for IHT, then HM Revenue & Customs (HMRC) will reduce the IHT liability on your remaining taxable assets from 40 per cent to 36 per cent. This only works for deaths on or after the start of the last tax year.

“In practice this means that, if you are liable to inheritance tax and you are currently leaving at least 4 per cent of your net estate to charity, you should consider increasing this to 10 per cent,” says Turner, as your family would be no worse off and the charities you want to benefit would obviously be better off.”

● Review your will

If you intend to leave money to charity you should review your will to ensure that the costs associated with settling your estate do not eat into the funds available.

● Consider a deed of variation

If someone has died on or after April 6 2012 without changing their will to benefit a charity, it’s not too late to benefit from the new reduced IHT rate on charitable gifts. A solicitor can put things right through a simple deed of variation if this is done within two years of the death.

● Consider lifetime giving

Leaving money to charity in your will reduces IHT, but donating while you’re still alive – lifetime giving – may be more tax-efficient. Chosen charities will benefit earlier and could get a top-up through gift aid if you are a taxpayer.

● Think about donating your pension fund

Leaving your surplus pension fund to charity can be very tax-efficient. Funds paid as a lump sum to a charity are free of tax, while lump sums paid to your family could be subject to a 55 per cent tax charge. This means it may be better to use your pension fund to make charitable gifts, even if your estate is then subject to the full 40 per cent inheritance tax rate.

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‘More bang for your buck’

When Stephen Dawson became a venture philanthropist he thought his business skills would be irrelevant. However, he quickly realised he could use his 30 years of experience in private equity in his quest to deliver social change.

“I decided to take the best of the business world and the best of the charity world and create something new,” he says. “In both, it is about getting more for your money – this has become even more important since the start of the financial crisis as people want more for less.”

He helped set up the European Venture Philanthropy Association and co-founded Impetus Trust and Jacana Partners.

He says charities are a bit like cars. “The engine is the cause, but unless you have the steering wheel and the body of the car you can’t actually get anywhere,” he explains. “Providing the rest of the car is what venture philanthropists can do, and often in a much more effective way than charities have been used to.”

Approaching a charity from a private equity background means Dawson tends to conduct a lot of due diligence when looking at which charities to invest in and focuses on the “impact” his money can make to a cause. He also favours maintaining a very close working relationship with the charity and tends to set a period of time over which he will invest.

One international charity he has recently been involved with is Camfed International, which supports female education in Africa. The charity offers mentoring programmes for girls throughout their primary, secondary and tertiary education. The Impetus Trust provided £545,000 of funding for Camfed combined with pro bono expertise valued at £273,00 over a four-year period of the investment.

As well as focusing on the impact that donations are making, Dawson also believes it is possible to generate financial returns from philanthropy. “There is a trend towards investment results,” he explains. “If a profit can be made it can either be reinvested in an organisation or returned to the original investors – allowing them to recycle their capital.”