Ex-gratia payments out of charity funds

The Law Commission published its report on Technical Issues in Charity Law in September 2017 following a public consultation which revealed that many charities struggle with a range of technical issues in the law leading to unnecessary expense and preventing charities from dedicating their full resources to the public good. On 22 March 2021, the Government published its long-awaited response to the Law Commission’s recommendations and accepted most of the recommendations.

The Law Commission’s report made recommendations to give trustees greater autonomy in respect of making ex-gratia (moral) payments and we discuss the detail of this recommendation below.

An ex-gratia payment is a payment that the trustees feel morally obliged to make due to the circumstances but for which there is no legal basis. For example, a testator who leaves the remainder of their estate to a charity instructs their solicitor to change the will and include a legacy to a family member but dies before the amendment to the will is formally executed. In this situation, the trustees of the named charity may feel they have a moral obligation to allow the family member to receive the legacy. The trustees would need to seek authorisation from the Charity Commission to make the payment to the family member, regardless of how small it is in comparison to the residual estate. They would have to satisfy the Charity Commission that there are reasonable grounds for making the payment and, importantly, that it would be immoral to refuse it.

The requirement for Charity Commission authorisation can be unnecessarily time consuming and costly due to legal fees. The Charity Commission generally allows payments below £1,000 to be made without authorisation (although there is no statutory basis for this.)

The Government has accepted the Law Commission’s proposal to create a statutory power for charities to make ex-gratia payments below a certain value without the need for Charity Commission authorisation. The value will be determined by the charity’s income band. The proposed income bands and ex-gratia payment thresholds are:

  • £1,000, in the case of a charity with a gross income in its last financial year of up to £25,000;
  • £2,500, in the case of a charity with a gross income in its last financial year of more than £25,000 and up to £250,000;
  • £10,000, in the case of a charity with a gross income in its last financial year of more than £250,000 and up to £1 million; and
  • £20,000, in the case of a charity with a gross income in its last financial year of more than £1 million.

Of course, charities can make payments above these values but will need to apply for authorisation from the Charity Commission as they currently do.

The Government has also accepted the Law Commission’s recommendation to reformulate the test for making ex-gratia payments to allow them to be made where the charity trustees could be reasonably regarded as being under a moral obligation to make it and thus, allowing the decision to be delegated to any person in accordance with the recommendations above.

This change to the law will provide greater autonomy to trustees whilst helping them to save time and legal costs in respect of applications for consent. Trustees will still need to comply with their legal and fiduciary duties when making ex-gratia payments to ensure they are made in the best interests of the charity.

For more information

If you have any questions in relation to any of the matters covered above, please do contact your usual contact in our charities team or Safa Murad.