In this cost-of-living crisis, many charities will be looking at whether they can unlock their restricted funds and endowments to use them for other purposes, including to support their core operating costs.

All charities should review their restricted funds and endowments from time to time to make sure they are still fit for purpose. We’ve helped many clients to revitalise their charity’s funds and, in this blog, we set out some of tips.

Jargon buster – what are restricted funds and endowments?

Many charities hold funds that are subject to restrictions on how they can be spent. Those funds might have come from legacies, donations, grants or fundraising appeals etc.

Two common types of funds charities hold are:

Permanent endowment funds – these are funds where the capital must be invested and only the income generated from investment can be spent for the purposes of the fund (which might be the same or narrower than the purposes of the charity itself).

Restricted income funds – the funds must be used by the charity for particular purposes such as a particular project (but, unlike permanent endowment funds, the whole of the funds can be spent for these purposes).

Here are some of our top tips for unlocking restricted funds and endowments:

Tip 1 – first check the funds really are restricted

We’ve reviewed restricted funds and endowments for many charities over the years, and, most times, we find that at least one fund is not restricted at all. For example, your charity might have received a legacy gift and the donor, in his or her Will, may have requested or expressed a wish that the legacy is used by the charity for a particular project. The legacy in this case is not restricted – the charity can choose, but does not have to, follow the donor’s wishes.

Tip 2 – review the funds

Are the purposes still fit for purpose or are they out of date or no longer practical or have ceased to be a suitable use for the funds? For example, your charity may hold a restricted fund for use in a particular area that your charity no longer operates in. Or your charity may hold a large restricted fund where not all the funds are needed to carry out the particular purposes.

Where you have endowment funds, does the fund generate enough income or too much income to carry out the specified purposes? For example, your charity may hold an endowment fund where the income must be used to fund a scholarship, but the fund doesn’t produce enough income for that purpose.

Tip 3 – check what powers are available to change the purposes of funds

Sometimes (though less commonly), the governing document of the restricted fund or endowment itself might contain an express power which allows your charity to change the terms of the fund e.g. a power for your charity to decide to use the fund for different purposes.

Otherwise, there are two main ways that charities can currently change the purposes of restricted funds:

  • For charities holding small restricted funds and endowments (with income of £10,000 or less in the last financial year) and if certain conditions are met, the trustees can use the statutory power in s275 Charities Act 2011 to resolve to change the purposes of the fund, subject to Charity Commission consent.
  • For charities holding larger restricted funds and endowments, its currently necessary to apply to the Charity Commission for what is known as a “cy-pres scheme” to change the purposes. There are various hoops to jump through to obtain a scheme.

There’s also currently a statutory power in s268 Charities Act 2011 for trustees to resolve to merge small restricted funds and endowments (again, those with funds income of £10,000 or less in the last financial year) if certain conditions are met, subject to Charity Commission consent.

However, all this is set to change when provisions of the Charities Act 2022 come into force (expected to be in Autumn 2023). A new statutory power of amendment will come in which will be available to change the purposes of restricted funds and endowments, regardless of their size, subject to Charity Commission consent and will allow trustees to make other changes. You can find out more about this by reading our Charities Act 2022 blog here.

The good news about the new power is that it will no longer be necessary to seek a cy-pres scheme to change the purposes of larger funds. But the downside is that, when the new power comes in, s268 (the power to merge small funds) and s275 (the power to change purposes of small funds) will be revoked.  We think the process in s268 and s275 is likely to be more straightforward and the test for changing purposes under the new power is stricter.

So if your charity has smaller funds, you may want to think about reviewing and updating them now, before the current powers disappear.

Tip 4 – look at whether you can release capital of permanent endowment funds

For endowment funds, there are statutory powers for trustees to decide to spend the capital of the permanent endowment fund, again subject to certain conditions being met. Charity Commission consent is only needed for larger endowment funds (broadly, where the fund is worth more than £10,000 and its annual income exceeds £1,000).

There will be some changes to the financial thresholds when new provisions of the Charities Act 2022 come into force (again, expected in Autumn 2023). Under the new rules, the requirement for Charity Commission consent will be determined by one financial threshold based on the value of the permanent endowment, which will be increased from £10,000 to £25,000 and the income test will disappear. If your charity has endowments which are between £10,000 to £25,000, you might want to wait until the new provisions come in. But if your charity has funds which are over £10,000 but with income of £1,000 or less, you may want to think about releasing endowment capital now before the rules change. Again, you can find out more about this by reading our Charities Act 2022 blog here.

Tip 5 – action any changes

Once you’ve reviewed your charity’s funds and identified relevant powers, your charity’s trustees can consider taking steps to make the changes, making sure they Charity Commission consent where needed.