The Charities Bill: Social Investment

Have you considered how the new Bill could affect your charity’s social investment activities? Our blog outlines key changes, focusing on investing permanent endowment and the restrictions on dispositions of land

In 2016 the statutory social investment power was introduced into the Charities Act 2011, which confirmed the ability of most charities to make social investments, being investments which both directly further the charity’s purposes and achieve a financial return. The current Charities Bill proposes certain changes that would affect social investment activities.

Investing permanent endowment

What do you need to know?

Jargon buster: "permanent endowment"

Permanent endowment

Property (cash, investments, land, buildings) gifted to a charity on the basis that the capital of the fund cannot be spent. The capital is to be invested and only the income generated from the investment can be spent for the purposes of the fund.

Under the current rules, charities are able to make social investments using their permanent endowment. However, any such investment must comply with the restrictions on endowment capital spending and cannot be made where the trustees anticipate a negative financial return. Under changes proposed by the Charities Bill, charities which have opted into a ‘total return approach’ to investing their endowment can resolve to use those funds to make social investments even where a negative financial return is anticipated.

Adopting a total return approach allows a charity to invest its endowment funds without being constrained by the distinction between capital gain and income in its returns. The total return approach enables trustees to allocate the value of unapplied capital gains on the fund to be spent for the purposes of the charity, as would be spent the income from the fund. The total returns approach can allow greater flexibility, particularly in response to fluctuations in investment income.

Under the proposals, trustees would be able to make social investments using all or part of a fund in relation to which the total returns approach has been adopted, including when a negative financial return is anticipated. The power will be subject to regulations to be made by the Charity Commission.

What action should you take now?

Charities that have opted into a total return approach may want to revisit any previous plans to make social investments using their permanent endowment, which had been shelved due to concerns around the anticipated level of financial return. Trustees should remember, however, that any restrictions on social investment imposed by the terms of the endowment would still apply.

What action do you need to factor into future plans?

The new power will only be available for charities that have adopted the total return approach in respect of the relevant endowment fund. Total return investment rules are complex and, if a charity wishes to explore opting into this framework, the trustees should consider whether to take legal advice.

Restrictions on dispositions of land

What do you need to know? 

The Charities Bill clarifies the rules on dispositions of charity land (such as conveyances, transfers or leases) made to another charity. This subsection would ensure that where the price obtained from the disposition is a motivating factor for the transaction (even if only a partial one, for social investment), the trustees will have to comply with the existing requirements to obtain advice on the terms of the disposition, and determine whether they are the best that can reasonably be achieved for the charity. These requirements are designed to protect against disposals at an undervalue and the charity will need to comply with these requirements if the disposal is made with a view to achieving the best price that can be reasonably obtained, or if the disposition is a social investment.

The proposals would also remove the requirement that the disposition be authorised by the trusts of the charity, in order for it to fall within the exception to the requirements to obtain advice. However, these amendments will not allow charities to make dispositions which they would not be permitted to make under the trusts of the charity. 

What action should you take now?

Charities considering making social investments involving a relevant disposition of charity land should ensure that they are aware of the requirements to obtain advice on the terms of the proposed disposal, and consider both the financial return generated by a transaction and the charitable return.

What action do you need to factor into future plans?

Trustees should factor into their plans obtaining advice, in order to gain a clear sense of the value of the land in question and make informed choices as to any level of discount that should be made to reflect the charitable return. Trustees must satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect it to achieve for the charity in both financial and charitable terms.

The Charities Bill, which came out of Lord Hodgson’s review of the Charities Act back in 2012 and the Law Commission’s report on Technical Issues in Charity Law in 2017, is intended to make life easier for charities by reducing regulation and clarifying grey areas in the law. In this new blog series, we untangle the new Bill to pull out the key points your charity will need to know, action now and plan for. Catch up with all the blogs in the series here.

If you have questions on this or any aspect of the Bill, or how it might affect your charity’s plans, please get in touch with Laura, Barbara and Phillippa. We’ll be happy to help.


This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of August 19, 2021.