Philanthropy in the Frame: How can artists engage in charitable activities?

The question of how to engage in philanthropy is an important one for artists. While some artists will have funds which can be used to make charitable gifts or to fund endowments, others may find that a large portion of their wealth is bound up in anticipated sales of their work and, therefore, relates either to future work or an unsold collection.

The way in which charitable and philanthropic activities are structured will depend on each particular case. Nevertheless, there are a number of issues which should always be considered when planning the establishment of a charity in the context of a particular artist. This article provides a brief overview of these.

What work will the charity do?

This is a pertinent question which will help to determine the structure and timing of establishment. Many living artists (and their families) will wish to establish a charity as a means of educating the public about the artist’s life and work, both during the artist’s lifetime and after the artist’s death. Some artists will intend the charity to hold and exhibit works and archival material (for example, letters, manuscripts and works of art) or indeed land (for example, an artist’s studio or home). Other charities will not hold works but will carry out educational projects or make grants (for example, by providing scholarship funding to art students).

An example of a charity established in connection with a living artist is The David Hockney Foundation (which advances the education of the public in art appreciation and holds a large collection of Hockney’s work). The Henry Moore Foundation was founded during Moore’s lifetime and holds land and a large sculpture collection in the UK. Recent press coverage about Tracey Emin details her intention to turn buildings she owns in Margate into a museum and archive following her death.

A charity might raise funds from donations and gifts (whether from the artist, family members or the public), entry fees (for entry to a museum space), the sale of works or items relating to the artist, or from artist resale rights or other income. The question of activities and funding will determine viability and, to that extent, whether the charity should be established during the artist’s lifetime or after death. It will also determine the structure of the charity. A ‘foundation’ is not a type of legal entity under English law; English charities are usually structured as either trusts or companies. A trust structure is generally more appropriate when a charity makes grants, and a corporate structure is more suitable to a charity engaged in operational activities or complex contractual arrangements.

Advancement of the Arts/Education

Once the scope of the charity’s activities has been decided, the activities will need to be framed within an existing charitable purpose or purposes. All charities must further a purpose which has been accepted in law as charitable. Charitable purposes are codified in the Charities Act 2011, with the two most relevant charitable purposes in the sphere of the arts being the advancement of the arts, culture and heritage, and the advancement of education. The advancement of the arts, culture and heritage is effectively a tributary of the advancement of education but has for many years been confirmed to be a separate purpose in its own right. The relationship between the two purposes has been considered in a number of cases which confirmed that artistic material needs to show educational merit to be capable of being charitable.

Generally, the charitable objects of artistic charities will reference the advancement of the arts, culture and heritage and/or the advancement of education usually in connection with promoting the legacy of the artist and educational aspects of his/her work. Importantly, charity trustees will need to demonstrate that the charity trustees will need to demonstrate that the works have aesthetic merit and can serve as a base for an educational analysis. This will generally be confirmed by academic and curatorial commentary and study.

Public Benefit

As well as furthering a charitable purpose, charities must provide public benefit. This involves ensuring sufficient public access, whether through displaying works or other objects or through the provision of educational information. Research carried out by the charity should be made available to the public, rather than being sold for profit.

Part of the public benefit test involves a requirement that private benefit (being benefit to private individuals or commercial operators) is incidental. Incidental is defined as being a necessary result or a by-product of carrying out the charitable purpose in question. Charity Commission guidance references this issue in the context of the arts by stating that the work of a living artist will inevitably benefit that artist by increasing the value of their work or the fees that they can command. One of the key issues faced by living artists seeking to establish charities will, therefore, be the need to rebut the presumption that the charity’s work will result in benefit to the artist, for example, by providing indirect publicity to the artist such that the work increases in value. This situation is easier to deal with in circumstances where the artist has already established a reputation and it can be argued that the work of the charity will not result in further benefit to the artist, or where the charity holds and sells the bulk of the artist’s body of work, thereby preventing the artist from benefiting. Where an artist has died, private benefit becomes more remote and the identification of persons benefiting privately would be more complex. To that extent, many artists will either: (1) delay the establishment of a charity during their lifetimes and instead provide for the establishment of a charity via their will; or (2) establish a charity during lifetime but specifically ensure that private benefit is managed, often resulting in a situation where the charity’s activities change following the artist’s death.

Funding the Charity

Consideration would need to be given to the ways in which the charity will be funded on establishment and how the charity will meet the costs of its proposed operations. This will be relevant whether the charity is established during the artist’s lifetime or after the artist’s death. If the charity is to hold or display work, or to provide scholarship funding, it will need funds to operate. Some charities are funded by an endowment from its founder, which is then invested and used to fund the charity’s activities. Other charities hold the artist’s work as an investment. In practice, this can be achieved in a number of ways. One of these is where the charity holds some or all of the shares (often in conjunction with family members) in a private company which, in turn, trades in the artist’s work. The charity would then receive dividends.

As an alternative, the charity could hold artistic works as investments, selling occasional pieces to fund the charity’s operations.

Both scenarios would need to take account of the rules on trustee investment and trading, including the need to consider:

• The issue of diversification (relevant when all of the charity’s investments are held in a single asset class).
• The management of conflicts of interest (particularly where the charity holds investments in companies owned or operated by family members or other connected persons).
• The need to consider the duty to enquire and supervise the running of a company in which the charity has a controlling interest.
• The rules on taxable trading (where the charity is trading, as opposed to investing, in art).

Governance

This is a key concern for charities established by living artists but will also be relevant to charities established after an artist’s death. The charity will need to be operated independently of the artist in question and it is not possible for the artist (or members of the artist’s family) to control the work of the charity. This requirement will play out by ensuring that the charity is run by independent individuals. While family members may sit on the board, there should be a majority of external board members. Powers of appointment of trustees by the artist are permissible, but a power of removal of trustees is not usually acceptable to the Charity Commission, on the basis that it can destabilise good governance.

Conflicts of interest will also need to be managed in relation to dealings between the artist (or members of the artist’s family) and the charity, including, for example, arrangements as to the loan of artworks, gifts to the charity, or relating to intellectual property). The management of conflicts of interest will involve ensuring that there are sufficient numbers of independent individuals to take the decision in question.

Taxation

The Gift Aid scheme (which allows both the charity and the donor to benefit from tax relief) does not apply to gifts of artwork. Gifts of artwork to a charity will, whether made on lifetime or on death, be exempt from inheritance tax and will not use up the nil rate band. Lifetime gifts of art to a charity will be deemed to be on a no-gain/no-loss basis for capital gains tax. In making gifts to charity by will, consideration should be given to the reduced rate of inheritance tax (from 40% to 36%) when the deceased individual leaves 10% or more of his/her net estate to charity. In the case of eminent works of art, consideration ought also to be given to the applicability of the Cultural Gifts Scheme, HMRC’s Acceptance in Lieu Scheme and the Conditional Exemption Scheme. These issues are outside the scope of this article.

Summary

For artists considering the establishment of a charity, the biggest consideration will likely relate to timing of establishment and the nature of the charitable activities owing to the requirements around private benefit. In some circumstances, where an artist’s reputation is gaining momentum, it is worth considering delaying plans to carry out charitable activities relating to the artist in question until after death, when the issue of private benefit will be less acute. Charitable activities can still be carried out during the artist’s lifetime, usually by means of gifting cash or works of art to a charity on a tax-efficient basis with a view to having the charity fund more general charitable activities. Regardless of when a charity is established, advice will be needed on funding arrangements, investments and good governance, all of which should be carefully considered.