Ludmila Lekes

Ludmila Lekes

Former Private Client Manager, Philanthropy Services

Charities Aid Foundation


5 May 2021

Navigating the ethical and legal issues raised by so-called ‘tainted donations’ is one of the longest-running challenges for philanthropy. Elsewhere on this blog, we outline the dilemmas charities face when accepting historically problematic wealth, but it is important for any donor and charitable entity to also fully understand the legal definitions and implications of the term.

Tainted donations were first introduced into UK law through Schedule 3 to the Finance Act 2011 in an effort to prevent gift aid fraud that can occur in circumstances where a donation can no longer be classified as charitable, but is still used to gain tax relief.

Given that funds donated to donor-advised funds (DAFs) benefit from UK tax relief and Gift Aid is often reclaimed on donors’ behalf, all DAFs must comply with the above, as well as the UK charity law and HMRC guidance on tainted donations as set out in Annex viii in the HMRC’s detailed guidance notes for charities. Any outgoing grants that are later deemed non-charitable can have severe tax repercussions for the DAF, as well as the individual donors, and the beneficiary charity.


The Schedule 3 to the Finance Act 2011 sets out three conditions that must all be met for a donation to be considered tainted:

Condition A - the donation to the charity and arrangements entered into by the donor are connected.

*This would include a scheme, arrangement or understanding of any kind between the donors and the charity that may involve one or more transactions and results in a mutual understanding between two or more parties that some action will or will not be taken as a result.

Condition B - the main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity.

Condition C - the donation isn’t made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made.

*This is to ensure that a donation is still acceptable if the donor is a charity subsidiary or a housing association linked to the beneficiary.


The HMRC conducts its own checks on Gift Aid declarations, but any DAF provider still bears the responsibility for monitoring all outgoing grants to be able to demonstrate that it has taken all reasonable steps to ensure that outgoing donations adhere to the definition of a charitable donation as defined by UK law.

To identify problems at an early stage, and demonstrate that all outgoing payments are charitable, DAFs collect evidence of:

  1. The UK charitable purpose for which each payment was given
  2. Confirmation that there is no tangible material or financial personal benefit to donor as a result of the donation
  3. No link between the donor and beneficiary

Where the donor is linked to the charity in some way, for example he is a Trustee or Treasurer or a person connected to the donor is, the DAF needs to ensure that it is clearly demonstrated that the donor does not benefit from the donation or uses the funds for a non-charitable purpose. Subsequently, such connections and donations may need to be reported to the HMRC. However, this in no way delays any donations or creates additional administrative burden for the recipient charity.


DAF providers and donors making a donation that is deemed ‘tainted’ can no longer benefit from any applicable tax relief. If the donation would have otherwise qualified for the Gift Aid scheme, the DAF, the donor, and any other connected or advantaged person tied to the tainted donation are liable to pay an income tax charge on the repayment of tax that would have been due to the charity. If the charity was a party to the relevant arrangements and HMRC investigation concludes that it was aware of donors obtaining a benefit from the tainted donation, it equally faces a tax charge.


A number of changes to the UK legislation since 2011 and increased scrutiny philanthropists have rightfully become subjected to over the past years, have necessitated a more thorough approach to the everyday monitoring of and reporting on the activities of DAF providers in the UK.

The donors’ relationship with the charities they support, and the organisations’ acknowledgement of their benefactors may often tread the line of what could be considered a ‘donor benefit’, particularly in the context of corporate giving. To pre-empt any issues and help protect the reputation of both the donor and the recipient charity, it is always best to exercise caution and declare any possible ties to any charitable organisation ahead of issuing a grant. 

Whenever in doubt, please don’t hesitate to contact your private client manager for further guidance.