In our latest blog to untangle the Charities Act 2022, we take a deep dive into the law around legacies – including ex gratia payments, mergers and charity land.

What do you need to know?

The Charities Act 2022 contains some real nuggets for charities which receive legacies which should help remove some red tape and clear up some uncertainties. Particular areas of interest are: ex gratia payments, formalities where legacies include land, changing purposes of restricted legacies and legacies to charities which merge/the Register of Mergers.

Ex gratia payments

An ex gratia payment is a payment (or giving up an interest) which the charity doesn’t have a legal obligation to make and which can’t be justified as being in the interests of the charity, but the charity’s trustees feel under a moral obligation to make it.

Ex gratia payments come up most often in the context of legacies. For example, Anne makes a Will leaving her whole estate to a hospice charity. Before she dies, she gives instructions to her solicitor to change her Will to give a legacy of £5,000 to her niece Brenda, but she dies before she can sign her new Will. The Will takes effect leaving everything to the hospice and the niece has no legal claim, but the trustees of the hospice feel a moral obligation to pay £5,000 to Brenda.

It’s currently necessary to get consent from the Charity Commission to make an ex gratia payment (by Order), however large or small, although the Charity Commission has said it won’t challenge small payments – £1,000 or less – made without its consent. This can lead to disproportionate cost given the trustees will often need to get legal advice.

It’s also currently necessary for the decision to be made by the charity’s trustees as they have to feel the moral obligation, so decisions to make ex gratia payments can’t be delegated to staff.

Once the new rules come into force, charities will be able to make ex gratia payments up to a certain level without consent from the Charity Commission and trustees will be able to delegate the decision, which is great news – saving costs and trustee time. There still needs to be a moral obligation to make the payment, but this becomes an objective test.

The level of ex gratia payments that can be made without Charity Commission consent will depend on the gross income of the charity in its last financial year. Under the Act, charities with gross income of up to £25,000 will be able to make individual ex gratia payments of up to £1,000 while charities with income over £1 million will be able to make individual payments of £20,000 without Charity Commission consent.

A single payment exceeding the relevant cap will still need Charity Commission consent.

Charity mergers – the Register of Mergers

Charities merge for a wide variety of reasons, but this has implications for future legacies.

Say charity A merges by transferring its assets to charity B and charity A is then wound up.  Legacies left to charity A after it has merged and ceased to exist could be lost. But if the merger is registered on the Register of Mergers maintained by the Charity Commission, any legacy left to charity A post-registration is treated as a legacy to charity B. So this protects future legacies left after charity A has been wound up. Unfortunately, though, there are difficulties with the way the current rules are drafted which means that not all legacies are protected. In particular, the Register of Mergers does not protect legacies where the testator has provided for what should happen to the legacy if the named charity is no longer in existence.

An alternative is to keep charity A in existence as a dormant “shell” charity on the Register of Charities post-merger to receive future legacies. As this avoids the current problems with the Register of Mergers, at the moment many charities choose to keep a shell charity in existence post-merger, but this is administratively burdensome.

The Charities Act 2022 intends to address the current problem with the Register of Mergers. In particular, the new provisions will provide that the merged charity (here, charity A) is treated as continuing to exist despite the merger. This may avoid the need to maintain a shell charity, although this would need to be considered on a case-by-case basis.

Charity land

The Charities Act 2022 also contains a number of provisions designed to reduce the red tape and clarify uncertainties for charities which receive legacies which include property. Currently, before selling charity property, it is necessary for charity trustees to obtain advice in the form of a report from a qualified surveyor. The rules currently apply inconsistently to charity legacies depending on whether there is a specific gift of property or the property forms part of residue, whether the sale is by the executors, whether executors appropriate the property to one or multiple charities prior to sale and so on. The Charities Act 2022 will simplify the rules by providing that they no longer apply where land is held by or in trust for multiple charity beneficiaries. The rules on who can provide advice on sale are also being expanded which should make things easier for charities and potentially save costs.

We will be looking at the land provisions in more detail in a future blog.

Changing purposes of restricted legacies

Charities often receive restricted legacies which must be used for particular purposes or activities e.g. an education charity receives a legacy to provide bursaries to children in Wiltshire. Where the purpose doesn’t provide a suitable use for the legacy, it is usually necessary to seek a Charity Commission cy-près scheme to change the purposes of the gift, unless the fund is small. Under the Charities Act 2022, these rules will be simplified – see here – although it appears that the current rules may continue to apply where a legacy is left for a purpose that cannot be carried out at the date of death.

What action should you take now?

Ex gratia payments

As the new rules will simplify things for smaller payments, you may want to hold off on seeking Charity Commission consent for any that come up, especially later in the year when the new rules become closer. But, if, for example, this could cause delay to finalising the estate and receiving your charity’s legacy, you’re likely to want to go ahead under the existing rules.

Otherwise, as Charity Commission consent will still be needed for larger payments, you will want to proceed as normal under the existing rules.

Charity mergers – the Register of Mergers

Carry on under the current rules for now – make no changes to any shell charities.

Charity land

Continue to comply with the existing rules. Where a disposal comes up later in the year which might be simplified under the new rules, e.g. a sale on behalf of multiple charity beneficiaries, you may want to take advice to see whether it is worth holding off for the new rules.  

Changing purposes of restricted legacies

See our previous blog here.

What action do you need to factor into future plans?

Ex gratia payments

You are likely to want to review your policies for ex gratia payments and, in particular, you are likely to want to introduce a new policy on how to approach smaller ex gratia payments which will no longer require Charity Commission consent and update any schemes of delegation to provide for who can decide to make ex gratia payments on behalf of the trustees.

Charity mergers – the Register of Mergers

Review and consider whether to retain any shell charities (taking appropriate advice). Consider registering any mergers, including historic mergers on the Register of Charities (again, taking appropriate advice).

Charity land

Make sure you get to grips with the new rules on when you need to comply in relation to property legacies and who can provide advice, so that you are ready as soon as the new rules come in and update any policies.

The Charities Act 2022, which came out of Lord Hodgson’s review of the Charities Act 2006 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 Act 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 Act, or how it might affect your charity’s plans, please get in touch with Laura Soley or Leticia Jennings. We’ll be happy to help.