The Charities Act 2022, explained: permanent endowment and restricted funds

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Over time charities can find that the purposes of their funds have become out-of-date or impractical, or that a permanent endowment fund no longer generates sufficient income to justify the costs of administering it or to further the purpose(s)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. There are also statutory powers in the Charities Act 2011 which can allow charities to modernise their funds, enabling them to put them to good use. These powers were adapted in the Charities Act 2022.

Permanent endowment

Spending permanent endowment: Charities wishing to spend their permanent endowment may use statutory powers to decide to remove the restrictions on spending the capital subject to certain conditions. For larger funds – with a market value of more than £25,000 – the decision to spend permanent endowment is subject to Charity Commission consent. This threshold was changed in the Charities Act 2022, from June 2023: prior to the change 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.

Where the Charity Commission needs to give its consent, it must respond to a request from the charity within 60 days (prior to the Charities Act 2022, the time limit was three months).

The Charities Act 2022 also clarified some grey areas including making it clear that the powers are available to corporate charities holding permanent endowment.

The Charities Act 2022 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); 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.

Amending purposes and merging funds

Amending purposes: Charities which wish to change the purposes of restricted and endowment funds have a statutory power to decide to change the purposes, if certain conditions are met, subject to Charity Commission consent. Prior to changes introduced in the Charities Act 2022, which came into force in March 2024, this power was only available in relation to smaller funds, with an annual income of £10,000 or less. Changing the purposes of larger funds without an express power of amendment usually required the Charity Commission to make a scheme.

Since the Charities Act 2022, the statutory test which is applied by the Charity Commission in deciding whether to give consent to a change of purposes has changed slightly, and appears stricter than the old test which applied to the old 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. Prior to the Charities Act 2022, charities could use a statutory power to merge funds held for similar purposes by transferring the property of one fund to another if certain conditions were met, subject to Charity Commission consent. Unfortunately, this power was repealed by the Charities Act 2022. The new power introduced in the Charities Act 2022 allowing charities to change their purposes also allows charities to amend the terms on which restricted or endowment funds are held to introduce an express power to transfer property. This will achieve the same result, but does add a stage to the current transfer process – potentially making fund mergers more complex and costly.

What does this mean for your charity?

The statutory powers offer charities an opportunity to make the most of their restricted and endowment funds. If you have not looked at your permanent endowment and restricted funds for some time, a review can establish whether the charity could be using them more effectively.

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.

If you have questions on any aspect of the Act, or how it affects your charity’s plans, please get in touch with Laura Soley, Lucy Rhodes or Alice Faure Walker. We’ll be happy to help.

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.

Check out the new edition of The Charities Acts Handbook for a definitive guide to modern charity legislation, including all of the regulation brought in by the Charities Act 2022. Written by our team of specialist charity lawyers, the Handbook provides comprehensive guidance on practical issues faced by charities and is an indispensable reference for lawyers, accountants, trustees and all those involved in the running and management of charities.

The material in this article is provided for guidance and general information only and is not intended to constitute legal or other professional advice upon which you should rely. In particular, the information should not be used as a substitute for a full and proper consultation with a suitably qualified professional. Please do contact the Bates Wells team if you require further information.