Donor-Advised Funds for US-UK Taxpayers

A US donor-advised fund gives an American in the UK a US deduction but usually no UK relief, because Gift Aid and the share-gift relief apply only to UK charities. Appreciated shares given to a US fund can also trigger UK capital gains tax. Dual taxpayers need structures recognised where relief matters.

Donor-advised funds are the default giving tool for affluent Americans. You contribute cash or appreciated securities, take the deduction in the year you give, and recommend grants to charities over time. For someone who pays tax only in the US, that is simple. For a US citizen who lives in Britain and pays most of their tax to HMRC, the same gift can produce relief in the wrong country, a UK tax charge nobody expected, or a grant the fund's sponsor will not make. This guide covers how a donor-advised fund works for a US-UK dual taxpayer, where the reliefs land, and the structures families use instead.

Key takeaways

• A US donor-advised fund is a US charity. Its sponsor is a section 501(c)(3) organisation, so contributions can be deductible on your US return if you itemise.
• The UK does not recognise it. Gift Aid, higher-rate relief and the relief for gifts of shares are available for gifts to organisations that are charities for UK tax purposes. A US sponsor is not one.
• Gifting appreciated shares to a US fund can trigger UK capital gains tax for a UK resident, because a gift to a non-UK charity is treated as a disposal at market value, with no UK charitable exemption.
• Grants from a US fund to UK charities are possible but controlled. The sponsor must be satisfied that the foreign grantee is equivalent to a US public charity or must exercise expenditure responsibility.
• Relief usually lands in one country only. The US-UK income tax treaty does not give a general cross-border charitable deduction to individuals, so the structure has to match where your tax is paid.
• Large lifetime gifts to a US fund need inheritance tax review if you are within the scope of UK inheritance tax.

How does a donor-advised fund work?

The IRS describes a donor-advised fund as a separately identified fund or account maintained by a section 501(c)(3) organisation, called the sponsoring organisation. Once you contribute, the sponsor has legal control over the money; you, or your representative, keep advisory privileges over how it is invested and which charities receive grants.

For US income tax, a contribution to a donor-advised fund is a gift to a public charity, so it is deductible under section 170 of the Internal Revenue Code in the year you make it, within the percentage-of-income limits explained in IRS Publication 526. Gifts of long-held appreciated shares are usually deductible at market value, and the unrealised gain is not taxed in the US. The deduction only helps if you itemise rather than taking the standard deduction, which is why donors often "bunch" several years of giving into one tax year.

The IRS also polices abuse. Its guidance warns that it may disallow deductions and impose excise taxes where a fund is used to provide benefits to donors or their families. A grant cannot pay for a gala ticket, settle a personal pledge or otherwise benefit you.

Why does a US donor-advised fund give no UK tax relief?

UK charitable reliefs follow the recipient, not the donor. GOV.UK's Gift Aid guidance explains how a charity claims back basic-rate tax on your donation and how higher and additional rate taxpayers claim the difference through Self Assessment. Both depend on the recipient being a charity for UK tax purposes. A US sponsoring organisation, however large and respected, is not registered or recognised in the UK, so a gift to it earns no Gift Aid and no higher-rate relief.

For an American living in the UK, that matters because the UK is usually the higher-taxing country on their income. If most of your US tax is already eliminated by the foreign tax credit, a US deduction may save little or nothing in practice, while the UK relief you gave up would have been real money.

Can gifting shares to a US donor-advised fund create UK capital gains tax?

Yes, and this is the trap that catches the most sophisticated donors. GOV.UK confirms that you do not pay capital gains tax on shares you give to charity, and that you also get income tax relief on their value. But that relief is limited to gifts to UK charities. A gift of shares to anyone else, including a US donor-advised fund, is treated for UK capital gains tax as a disposal at market value.

Picture a US citizen resident in London who holds US index shares bought years ago. On a US-only view, donating them to a donor-advised fund is textbook planning: no US capital gains tax, a deduction at market value. On the UK side, the same transfer is a chargeable disposal. The UK taxes the gain, there is no US tax on the gain for the UK to credit, and the US deduction may be of limited value because the foreign tax credit had already reduced the US bill. The donor ends up paying UK tax to make a charitable gift.

The usual fixes are to give the shares to a UK charity instead, to give cash to the US fund and keep the shares, or to use a twinned structure (below) that lets the gift be made to the side that relieves it.

How can a US donor-advised fund support UK charities?

A US sponsor can make grants to a UK charity, but grants to foreign organisations are tightly regulated. Under the excise tax rules for donor-advised funds, a grant to a foreign organisation that is not itself a US public charity is a taxable distribution unless the sponsor either makes a good-faith determination that the grantee is equivalent to a US public charity, or exercises expenditure responsibility over the grant. Many sponsors set their own minimum grant sizes and due diligence timelines for foreign grants, so check the policy before you rely on a UK grant.

From the donor's side, the grant itself has no tax effect: the deduction was taken when the money went into the fund. The UK charity receives the money, but you receive no UK relief for it.

Which structures work for US-UK dual taxpayers?

Families who give regularly on both sides of the Atlantic tend to use one of three approaches, chosen by where the relief is worth most.

• A UK charity with a US affiliate. Many British universities, museums and charities have a separately incorporated US "friends of" organisation. Gift to the UK charity for UK relief, or to the US affiliate for US relief, depending on which country taxes you more heavily that year.
• A twinned donor account. Some providers operate linked charitable entities in both countries, so you can contribute to the UK entity with Gift Aid and higher-rate relief, or to the US entity with a US deduction, and recommend grants to charities in either country, subject to the provider's own due diligence.
• A dual-qualified charity. A small number of organisations qualify as charities in both jurisdictions at once. A gift to one can, in the right circumstances, be relieved in both countries, which is otherwise rare. Status must be confirmed for each organisation.

We do not recommend any particular provider or charity. Confirm US status using the IRS Tax Exempt Organization Search and UK status with the charity itself before you give. Our wider guide to charitable giving for US-UK dual taxpayers covers the treaty position and Gift Aid in more depth.

Does timing differ between the two countries?

Yes. A US deduction belongs to the calendar year in which you make the contribution, so a year-end gift has to be completed by 31 December. UK relief belongs to the tax year running from 6 April to 5 April. Gift Aid also has a useful carry-back: GOV.UK explains that you can claim relief in your Self Assessment return for donations made in the current tax year, up to the date you file, which helps if your income is falling.

For a dual taxpayer, that means a gift made in late December can count in the US for one year and in the UK for a tax year that is already three-quarters through, and a gift made in early April can sit in two different UK years depending on the day. If you are bunching US deductions into a single year, check what that does to the UK side before committing.

What about inheritance tax and US estate tax?

For US estate tax, a bequest to a donor-advised fund or other US charity is generally deductible. UK inheritance tax is less forgiving. The UK exemption for gifts to charities applies to UK charities, so a large lifetime gift or legacy to a US donor-advised fund may not be exempt if you are within the scope of UK inheritance tax. A lifetime gift to a sponsoring organisation is also not a gift to an individual, which can affect how it is treated. Anyone planning a significant gift or bequest to a US fund while living in the UK should have the inheritance tax position reviewed first. The wider interaction is covered in our guide to US estate and gift tax for Americans in the UK.

How does Next Tax Source help with cross-border giving?

We model a planned gift on both returns before it is made: the US deduction, the UK relief, any UK capital gains tax on shares and the inheritance tax position. Our US-UK accountants then record the gift correctly on Schedule A and in the charitable giving section of your Self Assessment return. Every return is reviewed by our IRS Enrolled Agent, who is also ACCA-qualified, and you approve and sign it yourself. If you are planning a year-end gift, book a consultation before the shares move.