In the third of a series of articles addressing the pressures on charities to find alternative sources of funding as the impact of the COVID 19 pandemic bites…

…we take a look at the option for a charity to release the locked up capital held as permanent endowments where it can be put to better use.

In line with the anticipated change to the definition of permanent endowment to be adopted in the proposed amendments to the Charities Act 2011 (included in the Charities Bill 2021) permanent endowment is property held by a charity on the basis that the trustees can only spend the income that the property produces and not the property or capital asset itself.  It is not uncommon for charities to hold permanent endowments which produce relatively low levels of income, or none at all and these could perhaps be put to better use if all or some of the capital assets are sold and the proceeds applied to further the purposes of the charity.

Permanent endowment can comprise a range of different types of assets including land, buildings, cash or investments.  For example, a charity may hold land which, when gifted, had a realistic prospect of generating a reasonable rental income but the property may have fallen into a state of disrepair and instead has become a liability rather than an asset or a charity may hold shares which produce a low income but whose capital value is growing.

In these circumstances charities can adopt a number of approaches, the effect of which is to release tied up capital to help further the purposes of the charity today to ensure its existence in the future.

Total return approach to investment

Trustees of charities can by resolution, passed in accordance with the Total Return Regulations 2013 as amended,  use an increase in the value of an investment as income.  The rules relating adoption of a total return approach permit up to 10% of the value of the investment fund (comprising both capital gain and income) to be used as income, however, any fund spent from the investment fund will need to be replaced at a rate and over a period to be decided by the trustees.  Trustees must take proper advice in relation to the exercise of this statutory power from someone the trustees reasonably believe to be qualified to give that advice based on their ability and practical experience of financial matters.  A total return approach gives trustees of charities the option to use both capital growth and income from a permanent endowment to help achieve the charity’s purposes where the trustees decide that it is in the best interest of the charity in the short and long term to do so.

Spending permanent endowment

The cost of administering a small permanent endowment might be greater than the income derived from it or a charity’s financial situation may be such that retaining the asset for the future is pointless when the charity’s overwhelming need is for income today.

Small unincorporated charities can pass a resolution, if the charity’s gross income in the last financial year does not exceed £1,000 or the market value of the entire endowment fund is £10,000 or less or the fund is not entirely given by one person, or two or more persons in pursuit of a common purpose, releasing the endowment from its restrictions and enabling it to be used for the purposes of the charity.  Where an unincorporated charity’s gross income is over £1,000 and the market value of the endowment fund is over £10,000 and the fund has been entirely given by one person or two or more persons in pursuit of a common purpose then the trustees can resolve to release the endowment fund but the resolution is not effective unless or until it is approved by the Charity Commission.

In the case of both small and large funds the trustees must be satisfied that the purposes set out in the trust to which the fund is subject would be carried out more effectively if the capital (or the relevant portion of it) could be spent as income.

Charity Commission Order or Scheme

If the above provisions cannot be used, trustees of charities can apply to the Commission for an order or scheme authorising the permanent endowment to be spent.  The essence of such an application is based on the charity’s trustees explaining why it is reasonable in the circumstances and in the best interests of the charity to permit the permanent endowment to be spent.

Summary

 Balancing the interest of a charity both in the short, medium and long term is no easy task but, where the survival of the charity is dependent upon cash today, it would be remiss of charity trustees to ignore the possibilities of releasing all or part of permanent endowment held to ensure the existence of the charity for tomorrow.

Lupton Fawcett Charities Department can help guide charity trustees through the regulatory requirements relating to the release of permanent endowment.  If you would like any further advice on the issues raised in this article please feel free to contact Lupton Fawcett’s Charities team .  In the first instance please contact Katie Dawson: email – Katie.dawson@luptonfawcettt.law.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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