Permanent Endowment

The Charities Bill makes many welcome amendments to the Charities Act 2011 (“CA 2011”) including in relation to regulation of permanent endowments which is often considered to be a complicated and complex area. The Bill goes some way to clarify the provisions in the CA 2011 as well as widening powers to spend from permanent endowment and introducing a new power to borrow from permanent endowment without Charity Commission consent.

Definition of ‘permanent endowment’

The definition of permanent endowment is simplified and describes more clearly when property will be considered to be a permanent endowment:

“For the purposes of this Act, property is “permanent endowment” if it is subject to a restriction on being expended which distinguishes between income and capital.”

For example, a gift of property subject to a restriction which prohibits the charity selling the property but still enables the charity to use income from the property towards its charitable purposes would fall within the permanent endowment definition.

Releasing restrictions on spending permanent endowment capital

The CA 2011 provides trustees of unincorporated charities with powers to spend permanent endowment capital if they are satisfied this would enable the trusts to be carried out more effectively. However, the power to spend funds “entirely given” by an individual or individuals for a particular purpose, which are above certain relatively low income and capital thresholds is subject to Charity Commission consent.

There have been doubts expressed in the past as to whether these sections apply to endowments held by corporate charities. The Bill helpfully makes clear that this is the case.

The Bill also replaces the current provisions for when Charity Commission consent will be required, with a single condition: the Commission’s consent will be required in all cases where the market value of the endowment fund exceeds £25,000. In practice this will provide charity trustees with the opportunity to spend many permanent endowments where they would previously have required the Commission’s consent.

When calculating the value of the endowment, any outstanding borrowing from the fund e.g. under the new power to borrow from permanent endowment referred to below will be included when determining whether the fund is over or less than the £25,000 threshold and accordingly, whether Charity Commission consent needs to be obtained to spend permanent endowment capital. Provided the charity trustees are satisfied it would enable the purposes to be carried out more effectively, the obligation to repay outstanding borrowing will be released as part and parcel of the resolution to release the fund from permanent endowment restrictions.

Procedure where the Charity Commission’s consent is needed

The Bill also amends when and how resolutions to release permanent endowment restrictions take effect and when it is necessary to seek the Charity Commission’s consent or “concurrence.”

• The Commission, when considering whether to concur with the resolution, will still need to consider the wishes of any donors to the permanent endowment fund (if there is any evidence of those wishes).
• The Commission will also still need to take into account any changes in circumstances relating to the charity. However, any such changes made will be looked at from the date the permanent endowment fund was created rather than from when the gift was made.
• The Commission will need to respond to the resolution before the end of the relevant period. The relevant period is 60 days (reduced from 3 months) beginning with the date on which the Charity Commission receives the copy of the resolution, subject to suspension of the time period if the Commission uses its powers to direct the trustees to give public notice or provide further information or explanation.

The shorter time limit in which the Charity Commission will now need to respond is sensible and brings it into line with time limits applying where trustees of small charities exercise their powers to modify objects.

Power to borrow from permanent endowment fund

The Bill creates a very welcome and pragmatic new statutory power enabling a charity to borrow from its permanent endowment fund without having to obtain an order from the Charity Commission. This power could be a helpful alternative to the removal of permanent endowment restrictions all together. 

Key features of this new statutory power include:

• The charity trustees may resolve to borrow the amount if they are satisfied that it is expedient for the amount to be borrowed, in the light of the purposes of the permanent endowment fund and the purposes of the charity (if different).
• The amount which can be borrowed from the permanent endowment fund cannot exceed the ‘permitted amount.’ There is a formula for calculating the ‘permitted amount’ but it aims to prohibit a charity from borrowing more than 25% of the total capital value of the available endowment fund (which is the whole of the charity’s permanent endowment if it is all subject to the same trusts, or any part of it which is subject to different trusts).
• Where a charity has opted to invest on a total return basis, under the powers in CA 2011 and the Charities (Total Return) Regulations 2013, the permitted amount is calculated by reference to the core capital, or “trust for investment,” as it is called under the Regulations, so not taking into account the value of funds held as unapplied total return or to be spent as part of the “trust for application.”
• Arrangements must be in place for the amount to be repaid within 20 years of being borrowed.  The 20-year clock starts on the date in which the borrowing is drawn down.
• When repaying the amount borrowed, the trustees can pay an additional amount (not exceeding the maximum estimated capital appreciation – found by applying a formula based on RPI, CPI or another equivalent index). This allows the trustees to borrow whilst complying with their duty of even handedness between the current and future beneficiaries of the fund.
• It is important to note that the trustees must apply to the Charity Commission for directions on how to proceed if it appears that they will not be able to repay the amount borrowed. Directions might include an extension of the repayment period or possibly release of the repayment requirement.

Total return investment

Finally, there is another welcome new power enabling trustees (of charities which already opt in to invest on a total return basis) to make social investments that they could otherwise not make (because it is expected that, although the social investment would further the charity’s purposes, it will make a loss). The Charity Commission is to make new regulations governing the exercise of this new power.