Charitable Trusts and Donor Advised Funds
A Clear Guide to Strategic, Tax-Efficient Giving
For many families and business owners, charitable giving is a meaningful part of their long-term legacy — and the way that giving is structured can substantially affect both its impact and its tax efficiency. Two of the most useful structures for serious, sustained giving in the UK are the charitable trust and the Donor Advised Fund (DAF).
This guide explains how each works, the tax advantages they offer, and how to choose between them.
FAQs: Charitable Trusts
Understanding the Charitable Trust
A charitable trust is a traditional legal structure in which assets are held by trustees and managed exclusively for charitable purposes, governed by a trust deed. It's typically the right choice where a donor wants a high degree of personal control, a clear public legacy, and an independent charitable entity that can outlast them.
The key features are:
-
It's irrevocable. Once assets are transferred into the trust, they cannot be returned to the donor — they belong to the charity in perpetuity.
-
It must serve a charitable purpose for the public benefit. This means meeting one of the recognised charitable purposes under the Charities Act 2011 (such as the relief of poverty, advancement of education, health, religion, or environmental protection) and demonstrably benefiting the public.
-
It's run by trustees. Typically, there are at least three trustees, who hold full legal and fiduciary responsibility for the charity's decisions.
-
It must be registered with the Charity Commission once its gross annual income exceeds £5,000.
A charitable trust suits donors who want to build something enduring under their own (or their family's) governance, often supporting a specific cause or community over many years.
Understanding Donor Advised Funds (DAFs)
A DAF takes a different approach. Rather than creating a standalone charity, the donor contributes to an account held within a larger "umbrella" charity — providers in the UK include the Charities Aid Foundation, Stewardship and Prism the Gift Fund.
The donor receives the tax benefits immediately on contribution, and the funds are then invested and granted out to charitable causes over time, on the donor's recommendation. Final legal authority rests with the sponsor charity, but in practice donors retain meaningful influence over where and when they deploy their funds.
DAFs suit donors who want flexibility and simplicity – the tax efficiency and "giving budget" of a charitable trust without the responsibility of running one.
Strategic Tax Benefits
Both structures offer substantial tax advantages — which can significantly increase the impact of every pound donated.
Inheritance Tax
Gifts to UK charities (whether direct, into a charitable trust, or into a DAF) are fully exempt from inheritance tax. There's also a further incentive: where you leave at least 10% of your net estate to charity, the IHT rate on the remainder is reduced from 40% to 36%.
Capital Gains Tax
Gifting assets that have appreciated — such as shares or qualifying property — directly to charity normally avoids capital gains tax that would otherwise be due on a sale.
Income Tax and Gift Aid
Cash donations from UK taxpayers qualify for Gift Aid, which adds 25% to your donation at no cost to you. Higher and additional-rate taxpayers can also reclaim the difference between their tax rate and the basic rate through their self-assessment return — a meaningful additional benefit.
Choosing Between a Trust and a DAF
The right structure depends on what you're trying to achieve. In broad terms:
-
A charitable trust offers maximum control, a public legacy, and the ability to build a long-term institution — but at the cost of more complex governance, ongoing administration, and Charity Commission obligations.
-
A DAF offers flexibility, simplicity, and immediate tax relief — but at the cost of ultimate legal control sitting with the sponsor charity.
Many families find a DAF is the right starting point, with a charitable trust becoming worth considering as their giving grows in scale and ambition.
A Note for Trustees: Investment Duties After Butler-Sloss
For charitable trustees, the most important recent legal development is the High Court's decision in Butler-Sloss v Charity Commission [2022] EWHC 974 (Ch), which clarified when trustees can take non-financial considerations — especially ESG and ethical factors — into account in their investment decisions.
In short: trustees can adopt an investment policy that excludes investments conflicting with the charity's purposes, even where such decisions might affect financial returns, provided they conduct a proper balancing exercise and act reasonably. The Charity Commission has since updated its CC14 investment guidance to reflect these developments.
Practically, this means that trustees of a charitable trust should:
-
Maintain a written investment policy that outlines objectives, risk appetite, and any sectors excluded on ethical or mission-alignment grounds.
-
Keep minutes of the balancing exercise — the reasoning for any exclusions, including how potential financial impact was assessed.
-
Take regulated professional investment advice, save where there is a clear and documented reason not to.
We support trustees in framing and reviewing these policies as part of ongoing charity administration.
How to Get Started
The path is usually shorter than people expect:
-
Decide on the structure that fits your goals — a charitable trust, a DAF, or, in some cases, both.
-
Define your purpose clearly, ensuring it meets the public benefit requirement.
-
Appoint trustees (for a trust) — typically at least three reliable, willing individuals.
-
Register the trust with the Charity Commission or open an account with a DAF provider.
-
Build the giving plan — including how funds will be invested while held, and how grants will be made
Talk It Through With Us
If you're considering structuring your charitable giving — whether through a trust, a DAF, or a combination — we'd be glad to help you choose the right route and set it up properly from the outset.