Charities across Scotland are watching with interest to see how major rule changes coming next year around pensions and Inheritance Tax (IHT) may affect legacies and donations to the sector.

A recent technical note issued by HM Revenue and Customs (HMRC) has focused attention on the fact that change is coming. We are already seeing an increase in enquiries, and expect this trend to continue, with the new rules essentially reversing a decades-old exemption, meaning most unused pension funds, along with certain death benefits, will become subject to IHT.

A growing point of discussion among charities is whether giving to them may actually benefit from this change, with legacies to UK-registered charities remaining IHT-free and counting towards the potential reduced rate of IHT (36%) when 10% or more of an estate is left to charity.

For many, these are complex situations and will require careful discussion with expert financial advisors.

Choosing the right giving structure

Against this backdrop, I am having an increasing number of conversations with individuals and families who are considering which legal model for supporting good causes is the best fit for them.

And there is no doubt that the Donor Advised Fund (DAF) is on the rise.

A DAF allows for money to be ring-fenced for either short or long-term charitable giving. This structure can be described as a charitable giving account operated by an existing charity (the DAF provider), which allows a donor to gift funds now and them recommend how those funds are distributed to other charities over time. It is generally regarded as a flexible, tax-efficient way of giving and is becoming more commonplace in the UK philanthropic landscape.

It also offers an alternative to establishing a standalone charitable family foundation and is widely regarded as offering advantages including greater speed, tax efficiencies, and reduced administrative and regulatory responsibilities.

Fund versus foundation: key considerations

The question of foundation versus fund is one which many are currently considering.

There is no doubt that, where there is a strong desire for control around areas such as grant making, investment decisions and family legacy, a standalone foundation would be the preferred option.

Individuals and families are, however, increasingly considering the merits of a DAF given that it avoids trustee duties and regulatory responsibilities.

Flexibility and succession planning

DAFs are also increasingly attractive to people who do not have family or partners to take on the responsibility of a family foundation when they are no longer there, helping to address succession planning considerations.

Charities do not, of course, have to be established in perpetuity and a DAF can make it more straightforward for a fund to exist for a defined period.

Fundamentally, DAF founders - or their families - can agree grant making parameters with the DAF provider, but they do not have the legal responsibility of charity trustees in this structure and therefore relinquish ultimate control. Ongoing fees will be a consideration, as might the lack of an independent identity. However, the potential for donor anonymity with this structure can be attractive to some.

That said, a DAF structure may afford the donor the choice and flexibility to be involved in the grant making to a greater or lesser extent, subject to the terms of the arrangements with the DAF provider or community fund.

Creating a lasting impact

Ultimately, family philanthropy can be hugely rewarding and can make a huge impact, often lasting beyond a person’s lifetime. It is critical for the future of our charities and the work they do, in countless ways.

With tax changes looming, there is a lot to consider. If you are considering giving, identifying the legal structure that works most effectively for you - and your legacy - is essential.