By Sarah Chiappini of Charles Russell LLP
It is not uncommon for charities (especially long established charities) to have assets that are held as permanent endowment. Put simply, the term 'permanent endowment' covers any land or funds (typically comprising investments or other assets) of a charity which the trustees cannot spend (other than the income arising from such an asset) because of a restriction in the charity's governing document(s) or restrictions imposed by the donor.
The law on the expenditure of permanent endowment
The Charities Act 2006 relaxed the legal position on the expenditure of permanent endowment. The relevant provisions on permanent endowment are now found in sections 281 to 284 of the Charities Act 2011 (the 2011 Act).
The current procedure
There are now different procedures regarding the expenditure of permanent endowment depending on the size of the charity. However, in all cases the statutory power can only be used if the trustees: 1. are satisfied that the purposes of the charity could be carried out more effectively if they used some or all of the charity's permanent endowment as well as its income; and 2. pass a formal resolution that the permanent endowment restrictions should be removed from all or part of the endowment concerned.
Small charities
Section 281 of the 2011 Act provides that a charity is a small charity if:
- its gross income in the last financial year was £1,000 or less; or
- the endowment which the trustees wish to spend has a market value of £10,000 or less.
The trustees of small charities do not need to obtain the prior consent of the Charity Commission with regard to this process. However, for the sake of good order a copy of the relevant minutes/resolution should be sent to the Commission for their records.
Larger charities
Section 282 of the 2011 Act provides that a charity will be considered a larger charity for these purposes if:
- its gross income in the last financial year was over £1,000; and
- the market value of the endowment fund which the trustees wish to spend (as recorded in its accounts for the last financial year, or if none, the value determined by a special valuation carried out for this purpose) is over £10,000.
Once the trustees of a larger charity have followed steps 1 and 2, above (i.e. determined that the objects of the charity could be carried out more effectively if all or some of the permanent endowment were expended and they have passed a resolution to this effect), they must then send a copy of the resolution to the Commission, together with a statement of the trustees' reasons for passing it.
The Commission has three months to decide, after having taken various factors into account, whether or not it will concur with the trustees' decision to spend the permanent endowment asset.
Functional or investment permanent endowment property?
The Commission makes a distinction between functional permanent endowment and investment permanent endowment in relation to the ability of the trustees to use the new statutory power. In its guidance entitled Permanent Endowment: What is it and when can it be spent, available on its website (www.charitycommission.gov.uk), the Commission takes the view that generally the statutory power to spend permanent endowment will only apply to permanent endowment assets held as investment and not as functional assets unless there is a power, express or implied, to dispose of functional permanent endowment and not to replace it.
It appears that the only circumstance in which the Commission considers that the statutory power could be used is where trustees propose to sell functional permanent endowment while preserving the purpose of the trusts relating to that asset. This might be the case where, for example, in relation to the sale of permanently endowed land, the proceeds of sale could be regarded as investment permanent endowment to generate an income to be applied for the maintenance and upkeep of any retained permanently endowed land. The trustees could then resolve, under section 282 of the 2011 Act (and subject to the Commission's approval of the resolution), to expend the capital as well as the income of the sale proceeds for the upkeep and maintenance of the retained permanently endowed land. We have recently worked with a charity to achieve a result along just these lines.
It will be clear from the above that this issue is by no means straightforward and we understand that the Commission is still developing its policy in this area. If charity trustees have functional permanent endowment property that they wish to sell, it would be advisable to approach the Commission at an early stage to seek guidance on whether or not the Commission considers that the new statutory power would apply.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.