UK: Time To Re-Merge?

Last Updated: 19 September 2011

By Mike Scott and Sarah Chiappini (Charles Russell LLP)

Is it time to consider re-merging your school charity with its foundation?

It is not uncommon for the land and buildings of an independent school to be held by one charity – often referred to as a foundation – and for the school itself to be run by a separate school charity. The historical reasons for independent schools being structured in this way will of course vary. One such reason was that in the 1970s trustees were nervous of the Labour Government's attitude towards independent schools. Consequently, in order to protect the charity's assets, namely the land and buildings, the running and operating of the school was hived off to a separate organisation, with the land and buildings being retained by the original charity (the foundation).

The trustees of the foundation then granted a lease, usually at less than a market rent, to the new school charity in respect of the use of the land and buildings for the purposes of running and operating the school. In addition, the foundation often provided means-tested bursaries and scholarships to pupils attending the school.

Is it still expedient to operate as two separate charities?

While such a structure may have been appropriate 30 or 40 years ago, it would be prudent for the foundation trustees and the governors of the related school charity to review whether or not this is still the case. It could be that the best interests of both entities are served by operating as one charity. (In most cases a new charitable company (NewCo) is established to which the unrestricted assets, liabilities and undertakings of the school charity and the foundation will be transferred.) However, trustees might conclude that a re-merger would put the foundation assets at risk because of potential liabilities arising from the running of the school.

The rationale for operating as one organisation

Before proceeding with re-merging, the trustees of the foundation and the governors of the school charity must be satisfied that: (a) they have sufficient powers, and (b) it would be in the best interests of their respective organisations. So far as (b) is concerned, they might consider that a re-merger would be the right choice for the following reasons.

1. By only having one operative charity the structure would be simplified, enabling greater transparency and public comprehension. The current structure may be difficult to explain to outsiders when fundraising; operating as a single charity would remove this confusion.

2. There are practical benefits arising from a streamlined structure since NewCo, as a corporate entity, would be running the current activities of both the foundation and the school charity.

3. As a limited company, NewCo would be the appropriate vehicle for conducting the business of the school, both in terms of being a legal entity to hold property and because of the limited liability it confers upon its members.

4. The lease between the foundation and the school charity would be cancelled. This would remove the somewhat circuitous arrangement whereby the school charity pays the foundation rent for use of the foundation's land and buildings and at the same time the foundation pays an amount to the school to fund scholarships.

Legal and practical considerations

Legal and practical considerations include but are by no means limited to the following.

The need to involve the Charity Commission

This will depend on the facts of each case. However, in our experience, provided that the Commission has all the facts and the rationale, it has been most co-operative.

Objects of NewCo

These will need to be sufficiently widely drafted to incorporate the current objects of the foundation and the school charity.

Permanent endowment/objects of the foundation

If the foundation has permanent endowment property it will need to be retained, but with NewCo being appointed its trustee. It is likely that the Charity Commission will need to be asked to extend the foundation's objects so that the land and buildings can be used by NewCo in connection with the running of the school.

Tax considerations

Charity mergers do not usually have tax consequences but in some cases the foundation or the school's accountants might advise that prior clearance is sought from HMRC. Pensions Specialist advice should be sought regarding the ability to transfer pension schemes to NewCo and whether any pension deficits would crystallise upon the transfer to NewCo.


If the foundation and/or the school charity are in receipt of, or are likely to be in receipt of, legacy income, it may be appropriate to ask the Charity Commission to retain either or both as an empty shell for the purpose of collecting legacies and passing them to NewCo.

The facts of each case will vary and this is intended to be an outline only of this matter and cover some of the relevant considerations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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