Modernising ageing endowments: considerations for schools

New legislation is on the horizon which may help schools to consolidate, re-purpose or otherwise breathe fresh life into their endowments and legacies.

Charitable schools can be recipients of generous benefactions from their communities of alumni. Such endowments are often designed to keep on giving. Generous donors endow funds where the capital is to be preserved and the income is spent on bursaries, scholarships and discrete projects according to rules which are often set by the donor.

These gifts can be the lifeblood of a school, but their enduring nature can bring problems.

With the passage of time, schools can find themselves with funds where the purposes have become obsolete or inappropriate: scholarships which do not meet modern standards of equality, for example, or bursaries designed to meet a need which no longer exists. Schools sometimes find themselves with numerous low value "pots" of funds which are inefficient to administer. Furthermore, some gifts might become increasingly difficult to use, such as where the designated purpose of the fund has been achieved and the money cannot be used for something else.  

Existing legislation

The existing process in charity law legislation for amending the purposes of charitable funds is differentiated by the value and legal structure of the fund. While trustees of low value funds may be able to take advantage of a light touch process for change, the process for medium to large unincorporated charitable funds is less clear and more labour intensive.

At the end of this year, new legislation (deriving from the Charities Act 2022) is expected to come into force which offers a streamlining of the pathway by which charity trustees can legally change the purposes of restricted charitable funds, regardless of size, value or structure, where to do so would be in the best interests of the fund.

Changing the purposes of charitable funds

To change the purposes of a charitable fund, a legal power of amendment is needed. This can be found in two places:

1. Express power of amendment: before looking to legislation, some funds have such a power in their governing documents. Checking this is the first port of call since such a power is likely to be very useful. This comes with caution, though, as an express power of amendment that can be confidently relied upon to change the purposes of the fund (rather than its administrative provisions) is quite rare.
2. Power of amendment in legislation: the relevant provisions of the Charities Act 2022 provide that if the trustees of a fund are “satisfied that it is expedient in the interests of the charity” they may pass a resolution by a 75 per cent majority to amend the purposes of the fund. The resolution then becomes effective after the Charity Commission provides written consent to the changes.
   
   

To obtain the consent of the Commission, the trustees (or, as is often the case in the example of a scholarship fund or similar, the school as sole corporate trustee) must make a case for the proposed amendment. The Commission will consider:

• the purposes of the charity when it was established,
  the desirability of securing that the proposed new purposes of the charitable fund are similar to the purposes being altered, and
• whether the new purposes are suitable and effective in the light of current social and economic circumstances.
  
  

The trustee must therefore make both a backward and forward looking case. This potentially requires research into the origins of the bequest as well as consideration of the current conditions in which the charitable fund is active.

In addition, trustees must also share with the Commission their understanding of the impact of the change upon beneficiaries of the funds and may, where relevant, need to carry out consultation.

If the Commission grants consent, the resolution of the trustee(s) becomes effective and the purposes of the fund are changed.

Questions to ask

Prior to the new legislation coming into force, schools may want to carry out an audit of older gifts to establish what restricted charitable funds it has as well as whether each is still serving its intended purpose. It would also be prudent to check the documentation for each is fund is intact.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2023