The Charities Act: implications for restricted funds and endowments

In particular, the 2022 Act, which will take effect later this year, will affect how easy it is to utilise money or property that was originally meant to be held by a charity forever, known as ‘permanent endowment’, and to alter the use of funds which are no longer fit for purpose. Here are some of the Act’s key implications, and elements that need to be considered in advance of the changes coming into effect.

Altering how a fund can be applied

Often, gifts presented to HEIs are restricted to a particular use, such as funding a scholarship, or, in the case of ‘permanent endowment’, there is a restriction on how the underlying capital can be spent – as opposed to the income which it generates. This arrangement can cause difficulties when the specific purpose of the fund or endowment can no longer be effectively fulfilled. This can be caused by changing circumstances – like the closure of a department, shifts in student demand or demographics – or even because the terms contravene the Equality Act. Issues can also arise if the income of a fund is no longer sufficient to address the original purpose of the gift – perhaps because of low rates of return or due to rising costs.

Currently, a charity can make changes to the terms of a fund without requiring consent from the Charity Commission, although the Commission does have the right to object within 60 days, provided that the income of the fund in the last accounting period was under £10,000 and the new purposes are as similar in character to the old ones as is practical in the circumstances. Other cases, however, require applying for a Charity Commission scheme, which can be a time-consuming process.

An institution can also resolve to spend down permanent endowment, if the income of the fund is below £1,000 or the capital is under £10,000, and so long as it is satisfied that the purposes of the fund could be carried out more effectively if it were to use some or all of the capital as well as the income. For values above those thresholds, an application to the Charity Commission is required.

The 2022 Charities Act

The first change to the current regime, due to come into force this autumn, is a simplification of the rules on amendments to governing documents. For restricted funds and endowments, this will confer a wide power to make any amendment to the terms, which is welcome. However, the reform comes with the caveat that changes to things like the purposes, winding-up provisions and the terms of permanent endowment will require active Charity Commission consent.

Significantly, that will apply regardless of the fund size and income level. In making its decision, the Commission will consider:

• the purposes of the charity when it was established, if and so far as they are reasonably ascertainable;
• the desirability of securing that the purposes of the charity are, so far as reasonably practicable, similar to the purposes being altered, and;
• the need for purposes which are suitable and effective in the light of current social and economic circumstances.

This new process will be an improvement for larger funds that would currently need a scheme to implement changes. But for those with an income below £10,000, it will generally be harder to adopt changes because the process is likely to be longer and involve more scrutiny. Because of this, HEIs should identify any funds that might need amendments, and determine whether resolutions should be passed now, under the existing ‘negative consent’ process, while it remains available.

The Act will introduce some more flexibility in how permanent endowment can be applied. Institutions will be able to borrow up to 25% of the value of their permanent endowment, with repayment over up to a 20-year period. In addition, in cases where ‘total returns’ investing has already been adopted, it will be possible to use permanently endowed funds to make social investments with a negative or uncertain return. However, it will still need to be applied for the specific purposes of the fund, not for the HEI’s purposes generally, and it must be an investment, rather than spending. This change may, therefore, be of limited assistance in many cases.

The Act will also create a single threshold of £25,000 capital value, above which Charity Commission consent will be needed to spend permanent endowment. That will simplify matters for smaller funds, as the need for consent will no longer depend on the (fluctuating) level of income. It could, however, catch a number of funds where the income for the previous year has been under the £1,000 limit but the capital is £25,000 or more. In those cases, there may be merit in proceeding with resolutions now, before the new regime comes into effect. The exact date is yet to be confirmed, though the Commission has stated that this part of the Act will come into force in the spring.

Next steps

The forthcoming implementation of the Charities Act offers a good opportunity for HEIs to review their restricted funds, and determine whether they require modernisation in order to remain fit for purpose. If they do, the key is to single out what exactly is causing the difficulty and how it can best be addressed within the spirit of the original gift. The question then becomes whether it makes sense to proceed with changes now, in the window before implementation of the legislative changes, or to wait for the new regime. That decision is likely to be influenced by the size of the fund and its income.

In either event, there is likely to be merit in a wider review of an HEI’s gift acceptance policy, template agreements and processes if they have not been recently updated. Indeed, it will also be important to ensure that donor engagement teams fully understand the potential implications of terms which might be proposed. Doing so should help to manage the risks around gift acceptance and ensure that agreements, and funds, are as ‘future proofed’ as they can be.