Technical issues in charity law: Changes to the law on ex-gratia payments

What is an ex-gratia payment?

An ex-gratia payment is a payment out of charity funds which trustees have no power to make (creating a breach of trust) but which they feel morally obliged to make. Examples include, where there is strong evidence that a testator leaving a legacy to charity intended for the charity legacy to be reduced, but did not amend their will, or where a donor lacks the mental capacity to make a specific donation.

What’s the current position?

Currently all ex-gratia payments require Charity Commission consent, with the standard for obtaining consent being relatively high.

In practice, management of legacies is often dealt with by charity employees with experience in this area, rather than trustees. In many cases, having to refer potentially small payments back to the Board is disproportionate and can cause delay.

What is intended to change?

Threshold for consent:

The Government had agreed that a new statutory power would be given to trustees, allowing small ex gratia payments to be made without requiring Charity Commission consent. ‘Small’ is understood in relation to the charity’s gross income: payments without authorisation can be made up to £1000, in the case of a charity with a gross income of £25,000; £2,500 for a charity with a gross income of more than £25,000 and £20,000 for a charity with a gross income of over £1million (thresholds subject to review). Charities would still need to report all ex-gratia payments in detail in their annual accounts in line with the Charities SORP.

Delegated authority:

The Government had also agreed that the test for making an ex-gratia payment would be reformulated to be ‘when charity trustees could reasonably be regarded as being under a moral obligation to make it’. This would mean that the decision as to whether or not to grant an ex-gratia payment could be delegated to the teams which manage the process day to day rather than sitting with the trustees. This should serve to reduce both time delays and the associated costs. Such delegation can be made by the trustees regardless of the payment value, so legacy teams with delegated authority will be able to make applications for Commission consent where the payment is above the threshold.

The Government was keen to stress, however, that trustees will of course retain ultimate accountability where such decisions are delegated.

Statutory charities:

Statutory and non-statutory charities currently have slightly different applicable rules in relation to ex-gratia payments. The Government had previously confirmed that the changes described would apply to both statutory and non-statutory charities and that the Attorney General, the court and the Charity Commission would all have the power to authorise statutory charities to make ex-gratia payments above the threshold limits.

Appeal to Tribunal:

Lastly, the Government agreed to standardise the appeal rights under sections 105 and 106 Charities Act 2011. This means that where Commission consent is required but not authorised, the decision may be subject to review by the Charity Tribunal (the present option being only to apply to the Attorney General).

When will it happen?

The changes to ex-gratia payments were due to come into force in Autumn 2022, in the first tranche of implementation; however, in October 2022, the Government announced that the implementation of sections 15 and 16 of the new Act (dealing with ex-gratia payments) would be deferred until “we fully understand the implications for national museums and other charities.” This came as a result of concern raised that the new changes could allow restitution of objects on moral grounds, cutting across existing legislation which prevents museums from using this route. Given the topical debate on this point, the full legal implications of the proposed changes are being reviewed.

It is not yet clear when any further amendments are likely to be announced. It is possible that implementation of sections 15 and 16 could be delayed until 2024, which in the meantime may be frustrating for the legacy teams and trustee boards, for whom these administrative changes were initially intended.