Times of financial crisis can lead to panic and poor decision making. We all generally make better decisions when we have all the facts at our disposal and time to properly consider matters. Even if your charity is running smoothly, all trustees need to act prudently, make sure that their charity’s assets are being properly managed and that trustees comply with any restrictions imposed on the assets.
With a bumpy financial ride likely to be facing many charities in 2021, many trustees as part of a wider financial planning exercise (including maintaining a prudent reserves policy) will be particularly focused on how accessible their charity’s assets are likely to be should they need to be liquidated to support the charity. The Charity Commission’s guidance on “Managing financial difficulties and insolvency in charities”, highlights this as one of the initial steps needed to assist trustees with proper planning:
Below we are going to consider restrictions on funds, and some of the options available for removing restrictions or re-directing funds. However, other assets may be relevant too: reviewing the trusts on which the charity holds any land may be equally important.
- Are your funds actually restricted?
AThe word “restricted” tends to be used as shorthand for what are technically many different arrangements which fall within the objects of the charity. The most common examples are as follows:
- If the charity’s trustees have allocated unrestricted income for a particular purpose (for example to repair the roof) this allocation, which might be necessary for prudent planning, is an allocation of the trustees and can be re-allocated if they so choose. These are technically “designated” funds and can be undesignated, at the trustees’ discretion.
- Funds may be given by donors subject to a non-binding letter of wishes. The trustees may decide it is in the best interests of the charity not to follow these wishes, by treating the funds as unrestricted (a letter of wishes imposes a moral, rather than a legal obligation). However, engagement with living donors may be needed and any reputational risk and similar harm to the charity considered. (1 and 2 are technically not “restricted” funds and can be spent (subject to the considerations above).
- If the charity fundraises from the public to fix the roof, the funds raised under the fundraising appeal will be restricted to whatever purpose the charity told the donors it was going to use them for. This can create funds narrowly restricted to a single purpose like fixing the roof, unless the appeal requests are well drafted and allow for unused funds to be re-directed to the charity’s general funds by the trustees. (Note that there are special provisions of the Charities Act 2011 for changing the purposes of funds raised from the public in an appeal, but these are beyond the scope of this note).
- Alternatively, funds may be given by a donor(s) on specific trusts, again, for example, to fix the roof. These funds may allow the trustees to either:
- spend both capital and income for the desired purposes (expendable endowment), or
- spend income only, whilst the capital has to be protected and invested (permanent endowment).
The options available to de-restrict endowment funds primarily depend on their capital and income value, and we explore these more fully below.
It is crucial to first assess who any “restricted” funds were given by and whether they are governed by a separate trust. If the charity has numerous small funds, it is often worth creating a spread sheet with details of the governing document, who the trustees are, and the value of the capital and annual income of the fund, and then assess whether it is permanent endowment or not. You may need professional help assessing the latter (the rules governing endowments are complex), but you will save time and money by undertaking an initial review yourself and gathering any relevant papers together into one pack.
Once this analysis is complete, it will be possible to ascertain whether any funds can be de-restricted, and the likely time frame and complexity of this process. We lay out below a brief review of the main options available.
- Powers to spend permanently endowed funds under the Charities Act 2011
First check the value of the capital and income of the fund.
- If the gross annual income in the fund’s last financial year is a £1000 or less (and/or the value of the capital is £10,000 or less), then the trustees can resolve to spend the capital if they are satisfied that the purposes of the fund charity can be carried out more effectively if the capital can be spent in addition to the income. This is normally a justifiable case where the fund has been in existence for some significant period of time, and the income being generated is no longer sufficient to be administered in an economically efficient manner. The Trustees’ resolution should refer to the section s.281 of the Act, and it is effective immediately on its being passed. This power is helpful in spending out small funds often given for scholarships, prizes, church flowers etc.
- If the gross income in the fund’s last financial year is over £1,000 and the value of its endowment exceeds £10,000, then the trustees can still pass a resolution to spend the capital (this time under s.282 of the Act), but the resolution will only take effect if the Charity Commission either concurs with, or doesn’t reply to, the trustees’ resolution within three months of the resolution being filed with them, (or if the trustees are required by the Commission to give notice from the date of the notice). As part of the process the Commission will consider the reasons given by the trustees for passing the resolution which have to be submitted with the resolution to the Commission, and have issued detailed guidance on what they expect to see based on the Act. Key factors to be taken into account are the original wishes of the donor, but then the needs of current and future beneficiaries, the charity’s finances, and changes to the social and economic environment in which the charity operates. These latter two points will be relevant if the charity is facing difficult financial decisions.
This obviously has time implications and uncertainty over when and whether funds can be spent, and so benefits from early planning. In addition, in some cases the Commission may require the trustees to give public notice of the resolution and then take into account any objections that are raised which will extend the process even further.
However, these provisions only allow permanently endowed funds to be spent on the existing purposes of the fund, they don’t allow the funds to be re-directed to a different purpose.
- Powers to change the Objects of endowed Charities Act 2011
These powers apply to all unincorporated charities, providing they do not hold designated land and meet the criteria below.
- If the gross income of the fund’s last financial year does not exceed £10,000, the trustees can change the Objects of the fund (s.275 of the Act) if they think it is:
- expedient in the interests of the charity for the purposes to be replaced; and
- so far as reasonably practicable the new purposes consist of or include purposes that are similar to those being replaced. We have seen the Commission interpret this requirement broadly (i.e. fairly permissively), but a supporting rationale is likely to be required. The resolution and a statement of reasons for passing it needs to be filed with the Commission and is effective within 60 days of receipt by the Commission, providing the Commission don’t object within that period.
2. If the gross income in the fund’s last financial year is over £10,000 the Trustees can only change the Objects with Commission consent to a “cy-près” application; i.e., an Order of the Commission, formally amending the terms of the trust (this is a relatively complex area and beyond the scope of this note).
- The Charity Commission’s published approach to assisting with de-restricting funds
The Charity Commission states that it will take the following approach to charities amending restrictions:
“If there are restrictions, in some instances there may be ways to amend these restrictions, but accessing or releasing restricted funds should only be considered if other options such as reserves are not possible. The Commission encourages you to also carefully consider the wider and longer-term impacts of making such a decision on your financial resilience and donor relationships. You should seek professional advice on this if you can. The Commission will be as helpful as possible, and offer what guidance we can.”
However, trustees should be prepared to present a well thought through reasoned case as to why the changes proposed are necessary.
- Other options if you cannot de-restrict permanently endowed funds
Where it is not possible to de-restrict permanently endowed funds it may be possible to increase the amount which can be spent from the fund by adopting a “total return” approach, or to borrow from the capital on the basis that it is repaid or treated as a social investment. Like the options above, both require careful attention to the charity’s legal powers and the trustees’ rationale for proceeding.
Lastly, insolvency is, of course, a very serious situation, which can sometimes lead to personal liability for trustees. If trustees think their charity risks becoming insolvent, we would strongly recommend that they obtain suitable professional advice as soon as possible.