In the Law Commission’s consultation on technical charity law issues there were differing views on what should be done with funds that are held as permanent endowment (i.e. where the capital cannot be spent). Some were in favour of relaxing the regime for accessing the capital, while others felt that this would allow the charity to override the wishes of donors and put the trustees at risk of criticism for ‘selling the family silver’.
After their idea for a new form of endowment known as ‘preserved endowment’ received a lukewarm reception, the Law Commission’s proposed a number of more limited recommendations including a power for charities to borrow from their permanent endowment. The relevant provisions of the Charities Act 2022 were implemented in June 2023 and so this power is now available to charities.
Over the past few years we have been advising clients facing financial difficulties on the options available to them to rationalise their funds, activities and legal structure in order to put themselves on a secure footing. Some of those charities were in the fortunate position of having endowment funds which they were able to unlock to support their operating costs but until recently, those who wanted to dip into their capital with a view to replacing it later on would have needed a Charity Commission order to do so.
Under the new power, charity trustees have a power to borrow up to 25% of their endowment without involving the Charity Commission if they can justify it as being expedient in light of the purposes of the charity and the fund, and the charity has arrangements to repay the borrowing within 20 years. There is no obligation to pay interest but the charity has the option of making additional payments to maintain the real value of the fund.
We recently helped an educational institution to borrow from its funds using the new power. Its reserves had been depleted during the pandemic and it urgently needed to access funds to meet its working capital requirements. Our client was comfortable that its post-pandemic recovery and growth plans would enable it to repay the funds and so borrowing from, rather than spending, the endowment was a viable option. Once the technicalities had been worked out and the resolution passed, the funds were available to spend on the charity’s purposes right away.
Borrowing will not always the right solution for a charity. There may be a clear need to spend down part or all of the endowment in order to fund a significant project or plug a gap in the finances which isn’t going away, and there are powers in the Charities Act 2011 which can facilitate this. But for charities which want to preserve their endowment over the long term but have an immediate need for funds, the new power offers an attractive alternative to a commercial loan.