Charities with valuable land often think about whether and how they might turn it to profit. That is even more the case in uncertain times when trustees are looking to secure their charity’s future. When schools, universities, religious orders or other charities look to develop their land, they will have to grapple with their title, the planning system and the developers just like any other landowner, but there are additional considerations specific to charities.
Do we have the power to sell?
Very often the first step will be to check the charity’s governing document, whether that is a Royal Charter, a set of articles of association, a trust deed… the list goes on, but there will always be some type of legal instrument. If it is not obvious whether this allows your charity to sell (or otherwise dispose of) your land, it could be worth getting some early advice.
Alongside this, you will need to think about whether any particular requirements or restrictions affect the land, in a way that might affect the power to dispose of it. For example, with older charities one often finds that trusts adhere to parcels of land, reflecting the terms on which they originally came into the charity’s possession. These might stipulate that land is held as ‘permanent endowment’ meaning it should be held on a permanent basis, either as an investment (generating a return for the charity by way of rent) or as ‘functional permanent endowment’ or ‘specie’ land, where it must be applied for certain of the charity’s purposes (for example, as a school, or perhaps playing fields). These types of restrictions can sometimes be worked around with the right advice – and usually involving the Charity Commission – but they do need to be treated with due respect.
Has anyone seen the title deeds?
Any landowner looking to develop needs to do a title audit to look for restrictive covenants and other impediments to what is planned. It is particularly important for charities to do this early in the process. The ownership and management of a land asset is very often not a primary focus of concern for a charity. Consequently, it is common to find that a charity’s land is unregistered at the Land Registry, that title deeds are missing, or the title has never been transferred by some previous incarnation of the charity. Where the land is registered, sometimes the title register bears the names of long deceased charity trustees. Either way, this can cause problems later in the development process and needs to be addressed early.
But won’t there be tax to pay?
Well, it depends… sometimes, a sale of land by a charity can constitute ‘non-primary purpose trading’, resulting in a tax charge. That is, ‘trading’ activity that does not directly advance the charity’s objects; the tax charge can arise even though the trading is intended to, and does, raise funds for the charity that can then be deployed in advancing the objects. This is in contrast to, say, a country house museum and park charging an entry fee which is ‘primary purpose trading’ in that it directly advances the objects, and no tax charge results.
So, trustees need to be careful about how they structure their land projects. Just selling land in itself, even with the benefit of planning permission, will often be fine; in many cases it is really just liquidating an investment (gains on which will, broadly, be exempt from capital gains tax or corporation tax, depending on your charity’s structure, provided they are applied for the appropriate charitable purpose).
But developing land for sale at a profit is not something that a charity can really do, and neither is an overage arrangement with a ‘slice of the action’ element, that is, one whereby the charity stands to take a portion of the developer’s profit if and when the site is developed. What can sometimes be acceptable is extra cash being paid to the charity if the buyer gains a more beneficial planning permission than that with which the land was sold (this payment constituting a capital receipt rather than trading income). This is an area where charities need to take care, and specialist advice, as the tax risk of getting this wrong is very real.
If the arrangements just have to be structured with a tax risk – say, if a slice of the action overage deal is just too good to miss – this can potentially be achieved by routing the transaction through a non-charitable trading subsidiary. The relationship between a charity and its non-charitable subsidiary must always be conducted at arm’s length, with any conflicts of interest being managed, and without any subsidy flowing from the charity. This would not be as simple as the charity just giving the land to the subsidiary and waiting for profit to flow back at some future date. Instead, the site would need to be sold to the subsidiary for full value, potentially with the charity providing the purchase funds by way of repayable loan, at a market rate. The subsidiary would then do the deal, reap the rewards, and (in addition to repaying the loan) donate its distributable profits to its parent charity with the benefit of corporate gift aid.
What about the Charities Act?
Whether land is sold to a third party developer or the charity’s own subsidiary, you will need to consider this. But the detail of what is required will depend on exactly what the deal is. For example, a disposal to a subsidiary will (as it is a ’connected party’) need to be authorised by the Charity Commission.
The more ‘standard’ requirements under the Act, that would apply in either case, are (broadly) that the disposing charity’s trustees must before selling (a) obtain and consider a written report from a qualified surveyor instructed by them and acting exclusively for the charity, (b) advertise the proposed sale as advised unless the surveyor says it would not be in the charity’s best interests to advertise at all, and (c) decide they are satisfied, having considered the surveyor’s report, that the terms are the best that can reasonably be obtained. The report needs to hit certain notes that are specified by regulations, so this is another point where legal advice is sometimes needed, but most decent surveyors’ practices will be very familiar with the requirements.
We’ll need to keep our wits about us…
That’s right. Charities with valuable land are usually very able to take the full benefit of it, but they do need to be much more careful in certain areas than other landowners would be. There can be significant tax risks, and sometimes a bit of careful corporate structuring is needed. Getting it wrong can mean serious consequences but getting it right can mean big sums being released for deployment for your charitable purposes. Happily, the paths we have described here are all well-trodden.
If you require further information about anything covered in this briefing, please contact Philip Reed or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2020