Tax-free donation not affected by proposed tax relief cap

Allia’s latest round of Charitable Bonds is open for investment, offering investors up to 10% return on maturity or up to 14% upfront tax-free interest donated to their chosen charity.

The Charitable Bond is a 5-year fixed-return ethical savings bond that allows investors to do something good with their money at minimal risk. Investors in the bond share the interest with their chosen charity, deciding how much if it they want to receive – if any – on maturity, and how much they want to donate upfront to their charity.

Issued by Allia, a charitable investment intermediary, the Charitable Bond also allows investors to see exactly where their money goes and know that none of it is used to pay for dividends, bonuses or corporation tax. Allia obtains the interest by lending to Places for People Homes, an AA rated ‘not-for-dividend’ social housing provider, and is used to develop housing and to provide a range of services like job and training opportunities and specialist support and care to enable people to live independently in their own homes.

Allia lends the money at a fixed rate for five years, allowing it to offer investors a fixed return on maturity and to discount part of the interest and release it upfront to the investor’s chosen charity. In this current round, investors in a Charitable Bond can choose to receive up to 10% gross return on maturity, which will pay 5.8% upfront interest to charity. Alternatively, those investors who opt for zero return will see a donation of interest equivalent to 14% of their investment going straight to their charity.

That upfront donation goes directly to the charity before tax and isn’t counted as income to the investor. That means no administrative time and cost is spent on Gift Aid reclaim or self-assessment tax rebates. More importantly it means the donation won’t be affected by the government’s proposed cap on tax relief, nor will it affect the investor’s tax-relief allowance.

Henrietta Royle, who invested £10,000 in a Charitable Bond for her charity describes it as ‘a marvellous alternative way to give.’ “There may be quite a lot of people right now who don’t have significant amounts they can give” says Henrietta, “but do have some capital they are not getting much return on. They could put their savings to much more effective use in a Charitable Bond.”

Click here to download the full release

The good news is that any money raised for charity through an investment in a Charitable Bond won’t be affected by any cap and would not reduce a donor’s relief limit. Investments in the current round for example will result in the donation of up to 14% gross interest upfront to the investor’s chosen cause. Normally any money you give away has first been earned by you as income, which means you can only give it away gross to the extent that the government is willing to give you tax relief. But since the money released by a Charitable Bond investment goes directly to charity, it never counts as income. That means the whole lot can go untaxed as a charitable donation without the taxman able to touch any of it and without affecting any limit on the amount of tax relief that can be claimed by the investor on other charitable donations.

Personally, I hope the government is humble enough to listen to the feedback of charities and philanthropists and scrap the cap. But if not, at least there will still be one way round it.

Click here to find out more about investing in a bond, or browse the list of causes you can support. If your favourite cause isn’t registered with us, you can suggest it to us and we’ll invite them to join.

If you’re a charity and would like to know more about fundraising with us, please visit our fundraising section.

For any enquiries, please get in touch.

We will be opening a new round shortly, but in the meantime you can register your interest to invest by going to the page of the cause you want to support and clicking on ‘invest now’. If the cause you’d like to support isn’t listed, you can always suggest it to us and we’ll invite them to register.

The project will explore product, regulatory, access and compliance issues whilst also aiming to gauge the appetite for this emerging asset class amongst potential investors and those who advise them.

Joe Ludlow, NESTA’s Director of Social Ventures comments, “NESTA’s recent work has shown potentially significant demand for social investment products amongst individual investors. However we also know there is a strong need to better understand the distribution channels and means of communicating social investments if this latent demand is to be satisfied. Worthstone’s work will allow us to take our understanding further by practically testing social investment products through the vital IFA distribution channel.”

Gavin Francis, co-founder of Worthstone emphasises, “Impact Investment has started to be recognised as driving financial innovation which delivers measurable social and financial return. In doing so, this provides the financial services community with an opportunity to claim its place in society as one which supports and empowers social and economic progress”.

Supporting this initiative, Nick O’Donohoe, CEO Big Society Capital said, “We believe that developing the IFA market is crucial to the overall development of social investing in the UK. We are very supportive therefore of the important research which is being undertaken by Worthstone which will help ensure that the social investment market embraces IFA needs and regulatory challenges when developing product solutions for clients.”

The project is scheduled to report in April 2012.

For the full press release by Worthstone click here

This diversity of products is important to be able to finance the different structures required to deliver different outcomes and to meet the varying needs of different types of investor. But it can also cause confusion about the differences between each model. So here’s an overview of three models and their key features.

Social impact bonds

A social impact bond (SIB) is a type of payment-by-results contract with the public sector. The model is based on the fact that there are many social problems that create costs for the public sector (for example in criminal justice, welfare, health etc.) but could be prevented through early intervention. The problem is that the costs of dealing with the problems mean that there often isn’t enough funding for intervention programmes, and in any case the public sector finds it difficult to take risks by investing in innovative approaches to prevention.

The SIB solution therefore is to attract funding from private investors which is used to pay for a range of services to improve social outcomes. If these outcomes do improve, this will result in a cost saving for the public sector which can be used to return the initial investment plus a dividend to the investors.

Key features:

• The ‘social impact bond’ isn’t actually a bond in the proper financial sense at all. It was a name given to the concept that’s now stuck and is too difficult to change! In reality it’s a kind of social investment partnership, where investors make an equity investment into what is essentially a business trying to produce something which it can sell to a committed buyer at a fixed price.

• The structure offers the potential for reward upon success but also carries a potentially high yet unknown level of risk. The public sector contractor will pay (and only pay) for each outcome achieved above the level of outcomes that would be expected anyway without the intervention. That means the better the programme performs the higher the return investors receive (up to a cap), but if the programme doesn’t deliver any outcomes above the benchmark average then investors would lose all their money.

• As an investment partnership, it is currently not possible for retail investors to put money into social impact bonds and investors must be prepared to keep their money in the partnership for the duration of the programme.

Bonds by charities

Many profit-making companies raise finance by issuing bonds to investors with a fixed term and a fixed interest rate. This money is used to grow their business and generate increased income which enables them to pay the interest and return the investment at the end of the fixed term.

Now some charities are doing the same where they know they have a sufficiently robust business model to ensure repayment of investors. Scope, for example, have published a bond offer to raise money which they will invest in their fundraising activities and their range of charity shops in order to grow their income.

Key features:

• 100% of the investment in a bond like this will go to the charity to support its activities. This means that investors are taking risk entirely on the charity for the return of their investment.

• For organisations that have a strong enough business model, bonds like this may be cheaper than borrowing from the bank and an effective way of engaging new supporters. However many charities will be unable to take on and service a financial liability.

• Different bonds may have different structures and terms, and potential investors should look carefully at these in each case. Not all bond issues will be available to retail investors, they may have different minimum investment levels and they may or may not be listed on a platform that allows investors to trade their bonds should they need to recover their investment before maturity.

Charitable bonds

Allia’s charitable bonds are a means of using capital to generate a profit, just like a bank would. The bank would give part of that profit as interest to the investor and use the rest to pay tax, shareholder dividends, bankers’ bonuses and all its operating costs. Allia however, as a charitable organisation, only needs deduct a fraction for its costs, can offer the investor a return and then give the rest of the profit away to the investor’s chosen cause.

Key features:

• The charitable bond generates a profit from lending into the social housing sector. This is firstly extremely safe (Places for People Homes has a credit rating of Aa3) and entirely ethical.

• Investors are taking risk only on Places for People Homes (i.e. very low risk) and releasing a grant to their chosen cause.

• The minimum investment in the bonds is £100 and bonds are both transferable and redeemable early at Allia’s option.

To talk to us further about the differences and how our charitable bonds work, please contact us.

This comment was made following the publication of a review by NPC of Allia’s charitable bonds.

If you’re involved in running or fundraising for a charity, let us know what your views on social investment are and whether social investment is, or might at some time in the future, be part of your fundraising approach.

Allia’s second round of charitable bonds opens this week, offering a safe and ethical fixed-return savings scheme that releases an up-front grant to the saver’s chosen charity. Scope and Centrepoint are among the charities that are signing up with Allia for savers to choose.

In difficult economic times, charities around the UK are feeling the pressure. Research published last month by NCVO forecast that charities would face cuts of £2.8bn in government funding by 2016.  Figures released this month by Rapidata showed that cancellations in regular gifts to charities have reached record levels.

While donors may feel like they can afford to give less money away, Allia’s charitable bonds enable them to use their savings to give to charity while keeping their money safe and getting an optional return. Tim Jones, chief executive of Allia, explains:

“If you have money you want to keep safe for the future, you have to keep it somewhere. You can keep it in the bank where they’ll make a profit for themselves and their shareholders by lending it to companies you know nothing about. Or you can put it in a charitable bond where we’ll lend it out to create homes for people in need and release the profit up-front for your chosen cause.”

Click here to download the full press release

Richard Utting, head of organisational giving at Centrepoint, says:

“The pressure on income today means that organisations and their fundraisers need to look to new innovative sources of funding. We’re excited about working with Allia to unlock more financial support and change more lives.”

Tom Hall, head of philanthropy at Scope, says:

“The Allia charitable bond is a fantastic way for charities to generate unrestricted grant income through a safe social investment. It offers people and organisations with assets that they can’t afford to give away an opportunity to invest their money and support disabled people and their families.”

The pages for the two charities are still in development, so check back soon if you want to invest in support of either cause.

Other organisations that have signed up recently with Allia include:

• Oxfordshire Community Foundation
• Queen Elizabeth Hospital Birmingham Charity
• Training for Life
• International Health Partners
• The Challenge Network

If you’re looking to raise more funds for charity, click here to find out more about fundraising with Allia

Allia started in 1999 as Citylife and developed its unique charitable bond mechanism to raise funds through a series of campaigns for projects addressing unemployment and disadvantage around the UK. In 2010 it rebranded as Allia and created an online fundraising platform to allow other charities to raise additional funding through its bonds.

One of the charities benefitting from this latest round is Tomorrow’s People. The unemployment charity received £41,000 as a result of investments by East Sussex County Council, individual supporters and by investing some of its own reserves. Baroness Stedman-Scott, chief executive of Tomorrow’s People, said:

“The challenge to charities like Tomorrow’s People to raise the funds to deal with fundamental social issues is as great as it has ever been. Tomorrow’s People, being true to its colours, has sought to find innovative ways to bring in the funding needed to continue to make a difference. We applaud the commitment from those who invested in Allia’s bonds and we would ask others to get involved in supporting charities in this way so that they can further their good work.”

The biggest investor in the latest round was Abcam, a producer and distributor of research-grade antibodies in Cambridge. Abcam’s investment of £1 million will give it a return of £77,500 on maturity while releasing up-front funding for a new social and environmental enterprise centre in Cambridge. Abcam’s chief executive, Jonathan Milner, said:

“Abcam is delighted to support the new centre via a charitable bond – it’s an excellent mechanism for attracting funds from companies in that on maturity the initial sum is returned along with interest. We wish the new centre every success.”

The next round of charitable bonds will be opening shortly and more charities are being invited to register on Allia’s website to raise funds through the bonds. Tim Jones, chief executive of Allia, said:

“Our mission is to help more great causes raise more funding and give more people a better future. At a time when funding is so often squeezed, the charitable bond allows a charity’s supporters to give more than they can afford to give away.”

Click here to find out more about fundraising with Allia’s charitable bonds