This article is one of a series of articles focusing on the main areas of change effected by the Charities Act 2022 (the Act), which was enacted on 22 February 2022. This series is intended to provide a helpful resource in considering these changes and their implications for you and your charity.
What is permanent endowment?
At its most basic level, the term “permanent endowment” refers to property held by a charity which cannot be spent as though it were income. Capital in the form of cash, investments, and land can all constitute permanent endowment.
Often the restrictions on expenditure of these capital assets are created by donors who wish to provide a charity with a lasting gift that will endure into the future.
However permanent endowment is not necessarily always “permanent”. The Charities Act 2006 introduced significant flexibility for charities, and these powers are now being amended.
It is important to remember that the powers to spend permanent endowment discussed here generally refer to“investment permanent endowment” (ie permanent endowment in the form of shares, for example, which produce an income), rather than property directly being used by a charity to pursue its purposes (ie a village hall or recreation ground), known as “functional permanent endowment”. While land as an asset can be “investment permanent endowment”, any power to spend from it will involve spending its liquidated value (ie the proceeds of any sale of the property, where such a sale is possible).
The powers to release permanent endowment available to charities are being amended to simplify and widen the availability of the powers, alter the threshold at which consent from the Charity Commission is necessary, reduce the time limit for the Commission to respond to requests for consent, and eliminate the regime relating to “special trusts”.
Trustees will also be given a statutory power to borrow from permanent endowment, alongside a power (where a total return approach is taken to investment) to make social investments with a negative or uncertain financial return.
According to the updated implementation plan published by the Department for Digital, Culture, Media and Sport, the changes relating to permanent endowment contained in the Act will be brought into force in June 2023.
Why is it important?
A significant number of charities hold some form of permanent endowment, and trustees will have expanded powers to utilise this endowment in the interests of their charity. Trustees should consider the new options at their disposal to make use of these assets.
Who needs to think about it?
Trustees of any charity which holds permanent endowment, and in particular charities which may be in need of the greater flexibility afforded by the new provisions to better achieve their charitable purposes, meet financial difficulties caused by the coronavirus pandemic, and make social investments.
Philanthropists wishing to give permanent endowment to charity, or who may be considering the extent to which charities have the ability to release restrictions, should also have regard to the new changes.
The current regime
The version of the Charities Act 2011 presently in force (ie as amended prior to 2022) contains the statutory powers available to charities who wish to spend their permanent endowment, at sections 281 and 282. These powers only apply to a charity “which is not a company or a body corporate”.
Section 281 is ostensibly designed to allow smaller charities with a small amount of permanent endowment to easily arrange to spend it, without needing to approach the Charity Commission. Under section 281, a charity’s trustees have been able to pass a resolution to spend permanent endowment if: “(a) the charity has an annual income of up to £1,000; or (b) the value of the “available endowment fund” is up to £10,000; or (c) the fund is not entirely given by one person, or two or more persons in pursuit of a common purpose.”
Section 282 is available to charities which cannot follow the requirements for the simpler procedure under 281, and is shaped to require a trustee resolution along with Commission consent for expenditure by larger charities with larger amounts of permanent endowment. Charities have only been able to follow the section 282 procedure where: “(1) the charity’s annual income is over £1,000; and (2) the value of the “available endowment fund” is over £10,000; and (3) the fund is “entirely given””.
Criticism of the framing of these powers prior to the enactment of the Act has focused on the confusing and unhelpful threshold requirements, in particular for section 281 resolutions; and the current procedural rules relating to how that approval (or, in more exact terms, non-objection) can be granted. The parallel regime relating to “special trusts” at sections 288 and 289 (not discussed in detail here) has also come in for substantial criticism by consultees to the Law Commission’s consultation, and many consultees noted that these provisions had been seldom used.
The statutory powers for expenditure of permanent endowment contained at section 281 and 282 have been altered by the Act so that:
- The section 281 power to release permanent endowment (without the need for Commission approval / non-objection) will now depend solely on the value of the permanent endowment in question (regardless of the charity’s income and whether or not the endowment is “entirely given” – a troublesome concept that has been deemed unhelpful). This power is now exercisable for permanent endowment funds up to an expanded size of £25,000. This represents a simplification rather than an expansion of the section 281 power: when investment returns are low, the removal of the income threshold is actually likely to reduce the availability of the provision.
- The time limit for the Charity Commission to object to section 282 resolutions has now been reduced to 60 days, also with more generous time allowances for trustees where the Commission requests they give public notice of the resolution and / or ask for further information.
- The parallel powers regime for special trusts, widely regarded as defunct, has also been removed.
- Corporate charities should no longer be potentially excluded from using them, albeit everyone agrees that the circumstances in which permanent endowment property will not be held on trust will be few and far between.
The Act also grants two new powers relating to permanent endowment:
A power for trustees to borrow from permanent endowment (section 12)
Once in force, trustees will be able to apply this new power to the entirety of any given permanent endowment fund. The power is designed to be exercisable without Charity Commission approval, but there are a number of important safeguards included within the Act:
- Trustees can borrow – by resolution – up to a maximum of 25 per cent of the value of the permanent endowment,
- any amount borrowed must be repaid within 20 years, and trustees can only exercise the power where they are satisfied that arrangements are in place for the amount borrowed to be repaid within that period (ie they must have a repayment plan), and
- Trustees will need to seek directions from the Charity Commission if they consider that they may not be able to repay their borrowings within the necessary timescale.
The power to borrow against permanent endowment will give trustees an opportunity to spend money on projects which might further their charity’s purposes, but for which they might be reticent to borrow money at a commercial rate of interest.
- A total return investment (TRI) power to permit trustees to make social investments with a negative or uncertain financial return
This power will only be available to charities which have opted for a "total return" approach to their investments under the TRI Regulations. Taking a total return approach to investments means that both any increase in the capital value of permanent endowment investments as well as the income are available for expenditure.
Under the Act, trustees will have the opportunity to make social investments that are unlikely to, or will not return a profit for the charity. Under the current regime, such investments are prohibited. Trustees will have a choice as to whether to adopt this power, and – if they so choose – they must do so by resolution.
The Act also introduces a new, simplified definition of permanent endowment as a result of queries raised regarding the one currently contained in section 353 of the Charities Act 2011. This is however a technical change which is not likely to result in the recharacterising of any permanent endowment.
The importance of the changes
The Law Commission’s consultation showed that many working in the charity sector held differing understandings and assumptions about what the term “permanent endowment” actually means. The new statutory definition will, hopefully, provide trustees and charities with a single clear description of what the term is designed to capture, defining permanent endowment as capital held by a charity which cannot be expended (subject to the various statutory powers).
The amendments to the section 281 and section 282 powers to spend permanent endowment should also represent a step forward for many trustees. Making the section 281 power available to charities dependent solely on the size of the endowment fund itself (rather than the income of the whole charity) is a rationalising measure, helping to do away with present requirements decried as “uncertain, complicated, illogical and arbitrary” by the Law Commission. The removal of certain confusing aspects of the statutory powers to spend permanent endowment (ie the “special trusts” regime in sections 288 and 289) will also provide trustees and professionals with helpful clarity.
The expansion of the toolbox available to trustees in seeking to further their charities’ purposes, represented by the new additional powers to borrow and (where taking a total return approach to investment) make social investments with a potentially negative or uncertain financial return, will also prove highly beneficial – not least in these times of financial distress for so many charities and other social enterprises.
Trustees considering how they might make best use of their charity’s permanent endowment should start to think about which of the amended or new powers contained within the Act could be put to their advantage, and in particular:
think about reviewing their charity’s assets and funds to determine what is (and isn’t) permanent endowment,
establish whether or not the more permissive section 281 threshold requirements for the power to expend permanent endowment could apply to any assets held by the charity, and
consider whether the power to borrow from their charity’s permanent endowment could be utilised to help it meet its charitable purposes more effectively.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2022