The Gift That Keeps On Giving….

Written by Rory Dorman, ACA

Every now and again, something that seems too good to be true actually turns out to be the real deal, and today I would like to talk you through some explosively brilliant tax planning for those with a philanthropic bent. Some initial questions to get us started:

Are you a dual UK/US taxpayer?
Do you have earned income in excess of your day-to-day liabilities?
Are you philanthropically minded, but too busy to sensibly execute a charitable strategy?
And finally, do you have any investments lurking in a dark corner of your portfolio that are so pregnant with gains, that you are paralysed to divest through fear of the resultant tax bill?

If some of the above apply, we might just have some ninja tax planning on offer that will blow your mind, make you feel very good about yourself, and quite literally appear too good to be true. Fasten your seatbelt…

The Donor Advised Fund (DAF) is a thing of great beauty in and of itself. It is in effect a charitable investment account that an individual establishes to meet their charitable donation goals. It is also heroically tax efficient:

You receive a tax break on the way in. Each donation to the DAF is deductible against income tax.
You can also contribute assets that are pregnant with gains, and eliminate out the tax that would otherwise be due.
You can invest the funds sitting in the DAF through an investment account, and all the growth (income and realised gains) are tax-free.
And finally, you get to make charitable donations over time, from a pot that is earmarked for that very purpose.

So far, so simple, but there is still some magic to come…

There are such things as dual (UK/US) qualifying plans that give you a tax-break on BOTH sides of the pond.
So, you get the 45% UK tax break (assuming the donor is a 45% UK taxpayer).
But you also get a 37% US tax break (again assuming the donor is a 37% US taxpayer).

So now let me walk you through a real live example to explain why this really is ‘The Gift That Keeps On Giving’, and to highlight the dazzling tax efficiency behind it:

Brian is a big earner, with a £1m annual paycheck (thank you very much!).
Being of a generous and charitable disposition, Brian decides he can scrape by with a £900k paycheck, and elects to donate £100k (gross) into his DAF.
During a Progress Meeting with his talented Wealth Manager (let’s call him Rory!), he is persuaded to switch £100k cash for £100k of appreciated stock which is currently sitting with a 20% cost basis (Goldman shares that vested a decade or 2 back).
Now let’s crunch the numbers:

- The DAF receives £100k of appreciated stock, which it divests to cash on receipt.
- Brian receives 45% tax relief (£45k) deducted from his UK tax bill.
- He also receives 37% tax relief when he files his US tax return.
- Finally, he is giving away assets that were worth £100k pre-tax, but post paying 24% UK CGT (computing to a £19k tax bill), would have been a total “give-away” of £81k.
To summarise the numbers:
- The DAF receives £100k.
- The actual cost to Brian for his supreme generosity is £81k, minus a £45k UK tax saving and a £37k (or USD equivalent) US tax saving.
- Brian’s net give-away in shillings and pence therefore computes to (drum roll….) NEGATIVE £1,000.
- So, Brian actually makes money on this trade, while giving £100k (!!) earmarked for charitable causes.

Let’s all start giving, and feeling great about ourselves, while those in charge continue to give us the chance ….

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