Permanent endowment

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.

Permanent endowment is property belonging to a charity that cannot be spent. For trustees, it can be both a blessing and a curse depending on a charity’s circumstances. On the one hand, funds or property protected in perpetuity for the charity to use or, on the other, funds or property where the use is unhelpfully restricted and capital cannot be spent. The Law Commission Report recommended several changes that should clarify areas of confusion and, in certain circumstances, make the spending of permanent endowment easier.

Definition of permanent endowment
The definition of permanent endowment in Section 353 of the Charities Act 2011 is to be reformulated to remove its inconsistencies and lack of clarity. The revised definition will aim to capture any fund held subject to a restriction that the capital cannot be expended by any means. For example, a gift of shares subject to a restriction that only the dividends can be spent to further the purposes of the charity. The revised definition will make it clear that it does not capture special trust property where a fund is held subject to a restriction that it can only be expended on a specific purpose; or a fund held subject to a general restriction that only a certain percentage of it (whether capital or income) can be spent each year.

Spending permanent endowment
Charities face time when they want to spend permanent endowment funds for several reasons, for example:

  1. the fund might be so small that the costs of administering it are disproportionate to the income it yields;
  2. a charity’s overwhelming need might be current, not future, leading the trustees to the view that the charity’s purposes would be better served by spending part or all of the permanent endowment on its purposes now;
  3. as part of a total return approach to investment a charity might wish to spend capital in years of low-income yield; or
  4. a charity might wish to make a social investment that is expected to yield a negative financial return, and to invest the remainder of the permanent endowment in such a way that any loss on the social investment is offset by expected gains elsewhere.

Currently, sections 281 and 282 of the Charities Act 2011 allow, in certain circumstances, unincorporated charities to release permanent endowment and to spend the capital. The sections were drafted to cover example 1 above. The Government has accepted the recommendations of the Law Commission report to alter these sections. Several of the alterations will simply make the process easier and quicker to follow but the key alterations will be:

  • the power will be available to corporate charities as well as unincorporated charities i.e. to CIOs and charitable companies etc;
  • whether a charity can use the power will depend solely upon the value of the permanent endowment, regardless of the charity’s other income; and
  • the requirement regarding the permanent endowment to be 'entirely given' will be removed.

The effect of the changes should be to make the power to spend some permanent endowment more straightforward.

Borrowing from permanent endowment
The recommendation that trustees of charities should have a statutory power to borrow from the charity’s permanent endowment has been accepted. This new power will allow trustees to resolve to spend up to 25% of the value of permanent endowment subject to a requirement that they recoup the expenditure within 20 years.

This power is intended for ‘investment permanent endowment’ i.e. a fund of assets that produce an income to fund the charity’s activities where the charity can sell an investment in the fund to purchase another, but it cannot sell an investment and spend the proceeds to further its charitable purposes. It cannot be used to enable trustees to borrow from functional permanent endowment i.e. property that does not produce an income but is used by the charity to pursue its purposes.

The power will be available where the trustees are satisfied that borrowing would be expedient, and the trustees would be expected to consider the interests of both the charity and the available endowment fund (if different).

Social investment
The recommendation that trustees have a power, (once they have opted into the regulations governing total return of investment) to resolve that the permanent endowment restrictions be further released to permit them to make social investments, has also accepted.  This means that trustees will be able to make 'investments' for a negative and uncertain financial return which would not otherwise be permitted as 'investments'. The aim of this is to allow trustees further access to funds to further their charitable purposes whilst protecting the enduring nature of the permanent endowment.

For more information

If you have any questions or would like assistance in relation to permanent endowment do contact your usual contact in our charities team or Edwina Turner.

The full list of our series of ebriefings can be found below: