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Fiscal Privileges for Charitable Trusts: Altruism or Exploitation?

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About The Author

Connor Griffith (Consulting Editor)

Connor is a law graduate from the University of Nottingham with a particular interest in intellectual property and corporate law. He recently completed the LPC and is waiting to begin his training contract with a large national firm. Outside the law, he enjoys stand-up comedy and moaning about Brexit.

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The charity that is a trifle to us can be precious to others

Homer

For centuries, trusts for recognised charitable purposes have automatically and non-discretionarily received vast and generous privileges. The House of Lords in Dingle v Turner [1972] categorised these privileges into two types. The first – termed ’validity privileges’ – allow charitable trusts to become exempt from rules such as the beneficiary principle (requiring there to be appointed person(s) that are able to enforce performance of the trust) and the need for certainty of objects (certainty as to the person(s) for whom the trust was made).

This article is concerned with the second group of privileges, namely, fiscal privileges. These hold that a trust – simply by virtue of being deemed a ‘charitable trust’ –  will automatically be exempt from income tax, capital gains tax, corporation tax and stamp duty. This article examines the debate that surrounds these privileges: while some argue that this is an apt provision because society must promote the concept of charity as much as possible, others take the view that these non-discretionary privileges provide the potential for abuse by those that are looking to game the system.

Definition of ‘Charitable’

Following considerable reform over the years, the court in Independent Schools Council v Charity Commission [2011], channelling the provisions of Section 3 and Section 4 of the Charities Act 2011 (CA 2011), summarised the requirements that must be met for a trust to be awarded the status of ‘charitable’ as follows:

  • The nature of the purpose of the trust must be such as to be beneficial to the public
  • The carrying out of this purpose must benefit the public as a whole, or a substantial amount of the public, as opposed to being confined to a small group of private individuals; and
  • The trust must be ‘wholly and exclusively charitable’ (though this requirement is qualified where other non-charitable purposes of the trust are merely ancillary to the main charitable purpose – this point will not require elaboration below)

A Nature that is Beneficial to the Public

Inspired by the classification of charitable purposes in Commissioners of Income Tax v Pemsel [1891] outlined by Lord MacNaghten, Section 3(1) of the CA 2011 provides a list of 13 charitable headings – the nature of the purpose must fall within one of these headings to be considered beneficial to the public.

Out of these 13 headings, several stand out as potentially being exploitable by settlors of a trust. For example, this is notably evident in relation to the ‘prevention or relief of poverty’, particularly given that the term ‘poverty’ is to be defined subjectively after taking into account the various factors of each individual case.

Of course, this purpose has certainly been used for good: in Re Niyzai [1978] 1 WLR 910, it was used to uphold a trust that provided for the construction of ‘working men’s hostels’ and in Inland Revenue Commissioners v Oldham Training and Enterprise Council [1996] STC 1218, Lightman J employed it to uphold a trust intended to aid the unemployed set up a trade or business.

However, the subjective element in the establishment of what constitutes poverty is somewhat of a double-edged sword – while Lord Evershed in Re Coulthurst [1951] Ch 661 was astute to find that to ‘go short’ could mean different things to people at different social levels, it is unarguable that the social and economic implications of going short can have rather drastically different outcomes for those from a typically wealthy background compared to those that are struggling to repay mortgage loans.

Consider, for example, the example given by Chadwick J in Re Segelman [1996] Ch 171 of a student who, despite coming from a typically well-off background, may experience ‘relative poverty’ when their income from grants or parental resources fails to cover their expenditure on ‘their actual or perceived needs’. This reflects one of the controversies surrounding government grants to students – children of divorce, for example, are provided with the all-too-tempting possibility to claim that they financially rely on one parent (who does not work) instead of their other parent (who earns considerable amounts) in order to receive a large grant from the government despite also secretly receiving funding from their wealthy parent.

Ultimately, these concepts of ‘relative poverty’ and ‘perceived needs’ advanced by Chadwick J show that even a subjective approach to the evaluation of poverty has instrumental faults: the law could be viewed as closing its eyes to the opportunistic and immoral characteristics of certain members of the public.

Benefiting the Public as a Whole or a Substantial Party

Section 4 of the CA 2011 requires that the carrying out of the trust must benefit the whole or a substantial amount of the public. This requires consideration of the judgment given in Oppenheim v Tobacco Securities [1950], in which Lord Simmonds provided two scenarios that would render a class of beneficiaries a ‘section of the public’:

  • Where such a class were not ‘numerically negligent’ (so as to ensure that the trust had sufficient width in the benefit that it would grant); and
  • Where the identity of the members of the class could not be defined by means of a ‘personal nexus’ (to prevent unconscionable trusts that had as their object to benefit specific persons instead of the public).

This ‘personal nexus’ test provided what looked like much-needed protection in preventing the abuse of using charitable trusts simply in order to exploit the accompanying financial privileges. However, its application is limited: in Re Segelman, it was held to have no application over charitable trusts for the prevention or relief of poverty on the grounds that a gift for the relief of poverty is “no less charitable” because those whose poverty is to be relieved are confined to a particular class limited by ties or employment.

Furthermore, the personal nexus test, while providing an overarching attempt at preventing corruption, has been criticised as being too rigid to properly be able to differentiate between charitable trusts that actually require filtering out and those that are deservedly charitable but get caught by the overarching assumption that there is an ulterior motive at play.

Lord Cross in Dingle v Turner [1972], following the views of Lord MacDermott’s dissent in Oppenheim, argued for the rejection of the test and suggested that courts should instead have regard to the facts of each case, particularly considering (i) the size of the class, (ii) the purpose of the trust, and (iii) the fiscal privileges enjoyed as a consequence of charitable status. It is suggested that this would be an apt alteration as it would allow more precision in the determination of whether the trusts in question truly deserve the status of ‘charitable’.

Criticisms of the Current System

Dissatisfaction over the automatic awarding of fiscal privileges ranges as far back as to 1891, where Lord Halsbury LC and Lord Bramwell in Commissioners of Income Tax v Pemsel [1891] questioned whether the public good performed by the charitable purpose could justify the burden the exemption from taxation would place on the rest of the community.

This argument was considered and elaborated on by Lord Cross many years later in Dingle v Turner; he argued that, in deciding that some trusts are charitable trusts, the court is “endowing [them] with a substantial annual subsidy at the expense of the taxpayer”. In his view, it was

unfortunate that the recognition of … a charitable trust should automatically attract fiscal privileges, for the question whether a trust to further some purpose is so little likely to benefit the public that it ought to be declared invalid and the question whether it is likely to confer such great benefits on the public that it should enjoy fiscal immunity are really two quite different questions

In short, Lord Cross advocated for the separation of charitable trusts and the automatic application of fiscal privileges due to the fact that many ‘charitable’ purposes will vary in the extent to which they confer genuine public benefits.

In agreement with this, Penner gives the example of student unions, arguing that the charitable status attained due to their contribution to the education of university students clearly stretches the concept of ‘charity’ as there is no doubt that student unions do far less charitable work than, say, research into the causes and prevention of cancer.

Gravells, while agreeing that charitable trusts should not automatically receive fiscal benefits, makes the point that a trust will not be classified as charitable “unless a trust to further some purpose is calculated to confer sufficient … benefit on the public to justify fiscal immunity”. This suggests that the mandatory nature of the fiscal privileges can have the effect of requiring the courts to consider whether that trust, as well as being sufficiently charitable, is also deserving of the accompanying fiscal privileges. Where it is not so deserving, the court may conclude that it is not charitable, reducing the impact of the non-discretionary privileges.

However, he notes subsequently, this is rarely the case, with many institutions that can be regarded to be on the periphery of charitability still being awarded the status, as was the case in Re Watson [1973] 1 WLR 1472, where the trust to promote the work of the leader of a small group of non-denominational Christians comprising only members of the leader’s family was permitted charitable. Further, where a trust is obviously charitable it will make little difference in the mind of the judge whether the trust is deserving of fiscal privileges – a clearly charitable status will not be denied because of the inevitable consequences of undeserved fiscal privileges.

Does True Altruism exist?

Another important angle to view this issue from is that of scepticism towards the concept of charity as a whole. The awarding of fiscal privileges towards charitable trusts could potentially has the result of incentivising applicants to cover their secretly exploitative trusts in the shroud of charity in order to personally benefit from the non-discretionary system. If this is the case, it could be argued that greater care should be taken in selecting which trusts are to benefit from the fiscal privileges, for to give such benefits to every charitable trust would, in essence, be to reward he who acts under the guise of charity to pursue some selfish reason.

The ideal depiction of charity is that of true altruism, namely, that those operating the charity are doing so for completely selfless and noble reasons. For centuries, however, it has been contemplated whether the concept of ‘true altruism’ actually exists, or whether all actions, no matter how heroic and selfless they may appear on the outside, are actually driven by some selfish desire, either consciously or unconsciously. Nietzsche, for example, claimed that ‘pity’ is not selfless, but entirely self-motivated, elaborating on the comments made by Aristotle, who suggested that we only feel pity for those in whose shoes we could one day see ourselves.

Burton summarises the views of philosophers by writing that altruistic acts are

self-interested, if not because they relieve anxiety, then perhaps because they lead to pleasant feelings of pride and satisfaction; the expectation of honor or reciprocation; or … because they relieve unpleasant feelings such as the guilt or shame of not having acted at all

However, even if this view is correct and there is no true altruistic behaviour, it is submitted that there is one simple counter-argument to the above scepticism: does the motive behind charity matter? If the trust itself is sufficiently charitable, and real people with real problems are being helped by it, why should it matter if the morals behind the setting up of the trust are not entirely noble?

Surely it is desirable for these fiscal privileges to attract the setting up of as many charitable trusts as possible, as this will result in as much help being given to those that need it as possible. If this comes at the price of the system being gamed by some, then, it is submitted, so be it – the needs of the unfortunate should take precedence over concerns about morality and truth.

Conclusion

There should be no doubt that the law and society as a whole would benefit from granting the courts the ability to choose when to award these fiscal privileges: such discretion would allow for those trusts that truly deserve the fiscal privileges to still be awarded them, while ensuring that any trust that is simply attempting to freeload on the system without giving sufficient public benefit will be unsuccessful in its attempts. At the same time, this would ensure that the incentive for legitimate charities would still remain and thus would not be of significant detriment to anyone that is not trying to exploit the system.

The absence of true altruism, though voiced by some as a reason for concern, should not, it is argued, be a legitimate reason to remove the fiscal privileges completely. As written above, if the charity is helping others, less noble reasons behind such acts would be a vastly disproportionate reason to reduce the incentives for many to perform charitable acts. Discretion as to the operation of the fiscal privileges would allow the courts to separate the honest from the exploitative, while not setting up an unrealistic and impossible standard of completely true altruism.

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Tagged: Banking & Finance, Equity, Justice, Religion

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