How Permanent is your Permanent Endowment?

Permanent endowment funds are capital funds which are held in trust for the benefit of the charity over the long term and are subject to restrictions as regards how they may be used.  Permanent endowment assets are usually in the form of real property which can only be used for particular purposes (for example almshouses) or investments where only the income generated can be used for the charity’s charitable purposes.  The Commission is concerned that as other sources of income for charities are reduced charities may be tempted to spend permanent endowment assets without the necessary legal authority.

In this particular review the Charity Commission discovered that for fifty-four of the sixty charities the reduced level of permanent endowment was due simply to depreciation, investment losses or the application of the total return approach (which, in simple terms, allows trustees to treat a proportion of capital growth as income such that (with certain limitations) the capital growth can then be spent in the same way as income).  The remaining six charities had been able to re-classify some or all of their permanent endowment funds as restricted or unrestricted funds (because they had been incorrectly classified as permanent endowment) and then to expend some or all of those funds on their charitable purposes.

The Charity Commission was pleased with the outcome of the review and it is clear from the comments of its Chief Executive that the Commission is positively encouraging charities to review their assets (with the benefit of professional advice where appropriate) with a view to determining ways in which those assets might be used more effectively.

We would endorse the Commission’s view and would strongly recommend that periodically charities review their asset base, particularly where a number of different funds have built up over a period of time.

Our experience suggest that funds can be carried forward year on year as permanent endowment funds without reference back to the original gift and on occasions some funds are wrongly classified such that they are treated as permanent endowment funds when they could, in fact, be expended.  Even where funds are correctly classified as permanent endowment it is appropriate to regularly review the size and purpose of such funds.  It is often the case that charities have relatively small permanent endowment funds which generate insufficient income for any meaningful activity to be undertaken with that income.  In such cases there are provisions under the Charities Act 2011 which can be utilised to free up some or all of the capital sum to be applied for the purposes of the fund.  This not only enables a much more meaningful use of the available funds but also simplifies the accounting requirements for the charity going forward.

In a recent case we assisted a charity which had a funding shortfall.  We identified two permanent endowment funds which were not being applied as the charitable purposes of the funds had become obsolete.  We worked with the charity to obtain consent from the Charity Commission for a widening of the charitable objects of those funds and for consent to apply the full capital sum in each case in fulfilment of the extended objects.  These funds were then used to carry out two particular projects which otherwise would have had to be funded from the charities general funds thereby freeing those up to be used in other ways, achieving much greater overall benefit for the charity.

If your charity holds permanent endowment funds then this may be an opportune time for a review.  If we can assist in identifying whether the funds are correctly classified, advising as regards options for amalgamating funds, extending the purposes for which the funds can be spent and/or the process to be followed for the application of the capital sum then please contact Phil Watts on 0121 214 3645 or at [email protected]

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