In this blog we look at the changes to the rules affecting a charity’s permanent endowment and other restricted funds.

What do you need to know?

Many charities, including incorporated charities, hold funds which are subject to restrictions in relation to how they may be spent. These funds can be established in different ways, including donations, legacies and fundraising appeals. Two common types of fund which may be held by charities are:

Permanent endowment funds – the capital of the fund 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)

Restricted income funds – . the charity is free to spend the entirety of the fund but only for particular purpose(s) which are narrower than the purposes of the charity

Over time charities can find that the purposes of their funds have become out-of-date or impractical or that a permanent endowment fund no longer generates sufficient income to justify the costs of administering it or to further the purpose(s) for which the fund was set up.

In some cases, the governing documents of the funds will contain express powers to change the terms of the fund. More often, charities will rely on statutory powers in the Charities Act 2011 or seek a cy-près scheme to modernise their funds, enabling them to put them to good use.

The Charities Act 2022 is being implemented in stages until the end of 2023, altering the current rules for making changes to funds. The changes in relation to permanent endowment came in on 14 June 2023 and the other changes described in this blog (changes to the provisions for changing purposes and merging funds) will come in later this year.

Permanent endowment – changes that came in on 14 June 2023:

The key changes are as follows:

Spending permanent endowment: Under the previous rules, charities wishing to spend their permanent endowment could use statutory powers to decide to remove the restrictions on spending the capital subject to certain conditions. For larger funds – those funds with income of more than £1,000 and a market value of more than £10,000 – the decision to spend permanent endowment was subject to Charity Commission consent. But no Charity Commission consent was needed where the fund’s market value was £10,000 or less or the income of the fund was £1,000 or less.

Under the new rules now in force, the requirement for Charity Commission consent is determined by one financial threshold based on the value (and not the income) of the permanent endowment fund and this threshold has been increased from £10,000 to £25,000. The aim is that this simplifies the operation of the statutory powers and enables more charities to spend smaller permanent endowment funds without the bureaucracy and cost of seeking Charity Commission consent. However, we tend to find that quite large funds produce income of £1,000 or less and, under the new rules, it is necessary to seek Charity Commission consent to release permanent endowment restrictions on those funds which was not necessary under the previous rules. Under the new rules, helpfully, the time limit for the Charity Commission to respond is reduced from three months to 60 days. The new rules also clarify some grey areas under the current rules including making clear that the powers are available to corporate charities holding permanent endowment.

The Charities Act 2022 has also introduced two new powers in relation to permanent endowment funds:

  • a power for charities to borrow from their permanent endowment (subject to a limit of 25% of the value of the endowment fund and repayment within 20 years). There are a few grey areas in relation to the proposed new power but it is hoped that some of them will be clarified in Charity Commission guidance; and
  • for charities which have opted in to the total return regime, a power to resolve that permanent endowment may be used to make social investments. This will be subject to regulations made by the Charity Commission so it remains to be seen how this new power will be applied.

Amending purposes and merging funds – changes due in later this year

Amending purposes: Under the current rules (which are as yet unchanged by the provisions of Charities Act 2022), charities which wish to change the purposes of restricted and endowment funds with income of £10,000 or less (small funds) can use a statutory power to decide to change the purposes, if certain conditions are met, subject to Charity Commission consent. Changing the purposes of larger funds without an express power of amendment is often more difficult, usually requiring a cy-près scheme as described in our blog here.

The new rules: The new, expanded amendment power for unincorporated charities mentioned in our blog here (expected to come into force by the end of 2023) will be available to change the purposes of restricted and endowment funds regardless of their size. This will replace the current power which can be used for small funds and will avoid the need to obtain a scheme for larger funds. While this means charities will continue to have mechanisms to update the purposes of their funds, and there will be no change to the current requirement for Charity Commission consent, the statutory test which will be applied by the Charity Commission in deciding whether to give consent to a change of purposes under the new amendment power appears stricter than the current test which applies to the statutory power for changing purposes of small funds.

Merging funds: In some cases, charities find that their funds are too small and/or could be used more effectively if they were merged with other funds. For small funds, charities can use a statutory power to merge funds held for similar purposes by transferring the property of one fund to another if certain conditions are met, subject to Charity Commission consent. The current power also includes specific provision for transfer of permanent endowment.

The new rules: Under the Charities Act 2022, the current power to merge small funds will be repealed on the basis that trustees can use the new expanded amendment power mentioned above to amend the governing document of an unincorporated charity (including funds) to add an express power to transfer property, and so the statutory power will be redundant. While adding a power to transfer under the new power will not require Charity Commission consent, this will, however, add a stage to the current transfer process – potentially making fund mergers more complex and costly – and remove the flexibility available under the current regime for transferring small funds where the purposes of funds are similar, but not the same.  It is also not clear how the new power will apply where it is proposed to transfer permanent endowment.

What action should you take now?  

If you have not looked at your permanent endowment and restricted funds for some time, you should press ahead with a review of them now so that you can establish whether the charity could be using them more effectively. For small funds, you may want to press ahead to make changes under the current regime before the changes come in later this year which, in most cases, offers a simpler set of mechanisms for making changes. If you wish to change purposes of larger funds without an express power of amendment, unless it is urgent, you may wish to wait for the new amendment power.

What action do you need to factor into future plans?

A funds review will draw out any changes which will be more straightforward to make when the new rules come into force (for example, changing purposes of larger funds) and should be put on hold for the time being.

Charities which would like to access their permanent endowment but want to take a less radical route than spending may now want to make use of the new borrowing power. Unlike the previous regime, the new power to borrow does not require Charity Commission consent and provides a useful alternative to releasing permanent endowment restrictions altogether.

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 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 any aspect of the Act, or how it might affect your charity’s plans, please get in touch with Lucy Rhodes or Laura Soley. We’ll be happy to help.