The Charities Act 2022 (the Act) has made some key changes to charity law. The Act, which received Royal Assent on 22 February 2022, amends the pre-existing Charities Act 2011 in certain areas. The major changes have come into force in stages, with the implementation of various provisions on 31 October 2022, 14 June 2023 and 7 March 2024. The final changes are expected to come into force by the end of this year.
One of the key changes introduced relates to the use of permanent endowment funds, giving charities greater flexibility than before.
Using Permanent Endowment
Permanent endowment funds are a type of capital held by a charity which it is required to retain and invest, using only the income generated for ongoing operations, rather than the capital itself. See more here.
These funds were often created in situations where donors wished to give capital assets but with restrictions, to allow the charity to benefit from this donation well into the future, through providing a reliable income source.
There are generally two main types of assets which comprise a permanent endowment fund:
- Money or other assets held for investment.
- Property held by the charity which must be used for a specific purpose, which is linked to a charity’s purpose and objectives.
You can read more about these rules here.
Under the Charities Act 2011, it was not possible for charities to spend any element of the initial donation or investment held in the permanent endowment (except for when charities had opted to use the total return investment power. Taking this approach was previously the only way that charities could utilise increases in the capital value of the permanent endowment for expenditure).
The Charities Act 2022 introduces two new possibilities – charities can now do both of the following without authority from the Charity Commission:
- A charity can decide to spend a “small value” permanent endowment fund, defined as being one with a market value of £25,000 or less.
- Some charities can also choose to borrow up to 25% of the value of their permanent endowment fund.
These changes will impact many charities that have permanent endowment funds, as the trustees will now have greater powers to use these funds to further the charity’s objectives and purpose in a simplified way.
Rules for “small value” permanent endowment funds
You do not need to seek approval from the Charity Commission to spend a part of or all your permanent endowment fund if:
- The market value of the permanent endowment fund is less than £25,000
- You have concluded that you are able to fulfil the objectives of the permanent endowment fund more effectively by spending part of it, instead of just spending the income that the fund generates
- The permanent endowment is not designated land
Furthermore, you must make a formal resolution by following the charity’s governing document and keep a written record of the reasons behind the decision to spend from the fund.
If the market value of the permanent endowment fund exceeds £25,000, you can still spend some or all your permanent endowment, however you must obtain the Charity Commission’s authority in advance.
Rules for borrowing small amounts
You do not need to seek approval from the Charity Commission to borrow from a permanent endowment if you meet the following criteria:
- You are only borrowing up to 25% of the market value of your fund
- The fund is not comprised of designated land
- The charity’s governing document does not explicitly prevent you from using the power to borrow
In addition, you must be able to demonstrate that this route provides the charity with a clear advantage, for both the short and the long term, and of course allows the charity to ensure that the purposes of the endowment fund are being met.
Further to the above criteria, a plan for repaying the borrowed amounts must be put in place, and the total amount borrowed must be repaid within 20 years.
Finally, you must make a formal resolution by following the charity’s governing document, ensuring a written record of the reasons behind the decision is retained.
Further information
If you wish to borrow more than 25% of the market value of the permanent endowment fund, you can still ask for approval from the Charity Commission, but you will need to outline the reasoning for wanting to borrow more than 25%, and provide details of the other fundraising or borrowing options that the charity has explored. This must reflect that due consideration has been given for both long- and short-term needs and why this is the preferential course of action, for the charity to take.
The changes in relation to permanent endowment funds came into force in June 2023. This certainly provides charities who have permanent endowment funds with more options to better utilise these funds to achieve their charitable objectives more effectively, by exploring the options outlined above.
If you would like further information or guidance on this subject, please get in touch with our in-house expert on charities and the author of this blog, Sumeet.bajaria@myersclark.co.uk.
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