Setting up a Foundation in the UK: A Comprehensive Guide

In the United Kingdom, foundations play a vital role in providing funding and support for various charitable causes. They represent a significant portion of the charitable sector, with large foundations contributing billions of pounds in grants annually.

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This post provides a detailed guide on setting up a foundation in the UK, covering everything from legal structures to registration processes and operational considerations.

What Is a Foundation in the UK?

In the UK, a foundation is essentially a type of charitable organization that typically makes grants to other charities, individuals, or projects that align with its charitable objectives.

The term “foundation” in the UK is not a legal definition but rather describes the function of the organization – primarily as a grant-maker rather than a service provider.

Unlike in some other countries where foundations have a distinct legal status, in the UK, foundations are generally registered as charities under the Charity Act 2011.

They’re regulated by the Charity Commission in England and Wales.

Whereas in Scotland, they register with OSCR, and in Northern Ireland, they are registered with the Charity Commission for Northern Ireland.

Charity vs Foundation UK

The difference between a charity and a foundation in the UK is primarily functional rather than legal. All foundations are charities, but not all charities are foundations.

 The key differences include:

1. Operations: Foundations typically have an endowment and focus on making grants to other organizations or individuals. Charities, in a broader sense, may directly deliver services, run programs, or engage in activities to fulfill their charitable purposes.

2. Source of Income: Foundations often operate using income generated from an endowment or regular donations from a wealthy individual, family, or corporation. Other charities might rely more heavily on public fundraising, government grants, or earned income.

3. Terminology: The term foundation is not a legal classification in UK charity law.

According to a report from the Association of Charitable Foundations, grant-making by foundations has grown significantly in recent years.

Large foundations made a record £2.9 billion worth of grants in a recent financial year, with total foundation spending estimated at £6.5 billion. This makes foundation grant-making comparable to government grants to charities, representing about 43% of total government spending in the voluntary sector.

As Caroline Mack, chief executive of the ACF, noted, “Foundations are no longer the icing on the cake. In many cases, we are now the cake.”

This highlights the growing importance of foundations in the UK charitable landscape.

Can You Set Up a Foundation in the UK?

Yes, it is entirely possible to set up a foundation in the UK. The process involves establishing a charity with a grant-making focus.

To do so, you need to ensure your organization meets certain criteria and follows the appropriate registration procedures.

To establish a foundation in the UK, your organization must:

1. Have exclusively charitable purposes that benefit the public
2. Be independent of government control
3. Have a minimum of three trustees (in most cases)
4. Create appropriate governance structures
5. Register with the Charity Commission if your annual income will exceed £5,000

The UK has a well-established legal framework that supports the creation and operation of charitable foundations. This framework provides both legal protection and tax benefits, making the UK an attractive jurisdiction for establishing foundations.

However, it’s important to note that setting up a foundation requires careful planning and consideration of various legal, financial, and governance issues.

You cannot establish a charity and by extension, a foundation, solely to help one specific person or for purposes that don’t benefit the public.

What Is the Most Common Foundation Type in the UK?

In the UK, the most common legal structures for foundations are:

1. Charitable Trust: This is a traditional and popular structure for grant-making foundations.

2. Charitable Incorporated Organisation (CIO): Introduced more recently, a CIO provides limited liability protection for trustees while being regulated solely by the Charity Commission.

3. Charitable Company Limited by Guarantee: This structure provides limited liability protection for trustees and is regulated by both the Charity Commission and Companies House.

The choice of structure depends on various factors, including the size of the foundation, the nature of its activities, and preferences regarding liability and administration.

Many smaller family foundations opt for the charitable trust structure due to its simplicity.

On the other hand, larger operational foundations might prefer the incorporated structures that offer liability protection.

How Does a Foundation Work In the UK?

Foundations in the UK operate within a structured framework guided by charity law, governance principles, and their own established purposes.

Here’s how they typically function:

Governance Structure

Foundations are governed by a board of trustees who are responsible for ensuring the organization operates per its charitable purposes and complies with relevant laws and regulations.

The Essential Trustee (CC3) guide for trustee duties, which include:

1. Ensuring the foundation’s assets are used solely for its charitable purposes
2. Making decisions collectively in the best interests of the foundation
3. Managing the foundation’s resources responsibly
4. Acting with reasonable care and skill

Most foundations require a minimum of three trustees, although there is no legal maximum.

Trustees may be appointed based on their expertise, experience, or connection to the foundation’s mission.

Funding Mechanisms

UK foundations typically derive their funds from one or more of these sources:

1. Endowments
2. Regular donations
3. Fundraising

Grant-Making Process

The core activity of most foundations is making grants. This process typically involves:

1. Establishing clear grant-making criteria aligned with the foundation’s charitable purposes
2. Creating application procedures for potential grantees
3. Reviewing applications and conducting due diligence
4. Making funding decisions based on established criteria
5. Monitoring and evaluating funded projects or organizations

Tax Considerations

Registered foundations benefit from various tax advantages:

1. Tax relief on donations: Donations to foundations can qualify for Gift Aid, increasing their value
2. Tax exemptions: Foundations are generally exempt from income or corporation tax on their charitable activities, including investment income used for charitable purposes
3. Business rate relief: Foundations can receive up to 80% mandatory relief on business rates for premises used for charitable purposes

To receive these tax benefits, foundations must register with HMRC for charitable tax status.

How to Start a Foundation in the UK

Setting up a foundation in the UK involves several key steps, which align with the process of establishing a charity:

Step 1: Find and appoint trustees

Trustees are essential to your foundation’s governance. When selecting trustees:

• Choose individuals who understand their legal responsibilities
• Look for people with relevant skills or expertise
• Ensure they don’t have conflicts of interest
• Consider diversity of background and perspective

The Charity Commission provides guidance (CC30) on recruiting and appointing trustees, which offers a framework for the trustee recruitment process.

Step 2: Determine your foundation’s charitable purposes

Your foundation’s purposes must be exclusively charitable and benefit the public. Charitable purposes can include:

• Education
• Health and saving lives
• Poverty relief
• Amateur sport
• Arts and culture
• Environmental protection
• Animal welfare
• Human rights
• Community development
• Religious activities

It’s important to write these purposes carefully as they will define what your foundation can legally do.

The Charity Commission provides guidance on writing charitable purposes that comply with charity law.

Step 3: Choose your foundation’s name

Your foundation’s name should:

• Not be misleading
• Not be the same as or similar to an existing charity
• Not include words that require special permission (like “Royal”)
• Not suggest a connection to government or local authorities unless permitted

You can check existing charity names on the Charity Commission’s register before finalizing your choice.

Step 4: Determine your legal structure

Based on your foundation’s needs, choose one of the legal structures discussed earlier:

• Charitable Trust
• Charitable Incorporated Organisation (CIO)
• Charitable Company Limited by Guarantee

Your choice will affect your liability, regulatory requirements, and administrative processes.

Step 5: Create a governing document

The governing document is a legal document that sets out how your foundation will be run. It must include:

• Your foundation’s name and structure
• Its charitable purposes
• How trustees are appointed and removed
• How decisions are made
• What happens to assets if the foundation closes

The Charity Commission provides model governing documents for different charity structures

For reference, you can use the model governing documents that you can adapt for your foundation, which include:

• Model Trust Deed (GD2)
• Model Articles for Charitable Companies (GD1)
• Model CIO Constitution (foundation)
• Model Association Constitution (GD3)

Step 6: Register with the Charity Commission

You must register your foundation with the Charity Commission if:

• Your annual income will be at least £5,000, or
• You’re establishing a Charitable Incorporated Organisation  

The registration process involves submitting your governing document, trustee information, financial projections, and details about how your foundation will operate.

Step 7: Register with HMRC

To benefit from tax relief, you need to register your foundation with HMRC. This is separate from Charity Commission registration.

HMRC registration allows you to claim Gift Aid and other reliefs.

Step 8: Set up operational systems

Once your foundation is registered, you’ll need to:

• Open a bank account in your foundation’s name
• Establish financial record-keeping systems
• Create policies for grant-making, conflicts of interest, and other operational aspects
• Develop systems for monitoring and evaluating grants

Conclusion

Setting up a foundation in the UK provides a structured way to support causes you care about.

While the process involves several steps and considerations, the established legal framework and available guidance make it accessible to those committed to philanthropic giving.

Whether you’re an individual, family, or organization looking to make a lasting philanthropic impact, establishing a foundation can provide a sustainable vehicle for your charitable giving.

By carefully considering your structure, purposes, and governance, you can create a foundation that effectively advances your charitable mission and potentially give you tax perks.

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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.