UK: Expenditure Of Permanently Endowed Property

Last Updated: 20 December 2011
Article by Sarah Chiappini

It is not uncommon for charities (especially long established charities) to have assets that are held as permanent endowment. Put simply, the term "permanent endowment" covers any land, investments or other assets of a charity which the trustees cannot spend because of a restriction in the charity's governing document(s). The relevant wording in a governing document will vary from charity to charity. However, the overarching legal principle is that if the governing document of a charity provides that the income only of all or some of the charity's property is to be spent in furtherance of the charity's objects, then the capital of that property will be deemed to be permanent endowment and must therefore be preserved.

The law on the expenditure of permanent endowment

The Charities Act 2006 relaxed the legal position on the expenditure of permanent endowment. The relevant provisions on permanent endowment are now found in sections 75 and 75A of the Charities Act 1993 Act, as amended ("the 1993 Act"). Before this relaxation, only small charities with income of less than £1,000 per year were able to spend their permanent endowment if the trustees took the view that the fund was too small to be of any use.

The new procedure

There are now different procedures regarding the expenditure of permanent endowment for small charities and larger charities. However, in all cases the new statutory power can only be used if the trustees:

  • are satisfied that the purposes of the charity could be carried out more effectively if they used some or all of the charity's permanent endowment as well as its income; and
  • pass a formal resolution that the permanent endowment restrictions should be removed from all or part of the endowment concerned.

Small charities

Section 75 of the 1993 Act provides that a charity will be a small charity if:

  • its gross income in the last financial year was £1,000 or less; or
  • the endowment which the trustees wish to spend has a market value of £10,000 or less.

A charity will also be regarded as a small charity irrespective of the size of its income or the value of its endowment fund if the fund was not given by a particular individual, or a particular institution, or by two or more individuals or institutions in pursuit of a common purpose. Endowment funds falling under this description will tend to be less common.

The trustees of small charities do not need to obtain the consent of the Charity Commission. Once they are satisfied that the purposes of the charity could be carried out more effectively if they used some or all of the permanent endowment and they have passed a resolution to this effect they will be free to spend the capital in question. For the sake of good order a copy of the resolution should be sent to the Charity Commission for their records.

Larger charities

Section 75A of the 1993 Act provides that a charity will be a larger charity for these purposes if:-

  • its gross income in the last financial year was over £1,000; and
  • the market value of the endowment fund which the trustees wish to spend (as recorded in its accounts for the last financial year, or if none, the value determined by a special valuation carried out for this purpose) is over £10,000.

Once the trustees of a larger charity have followed steps 1 and 2 above (ie that the objects of the charity could be carried out more effectively if all or some of the permanently endowed property were expended and they have passed a resolution to this effect), they must then send a copy of the resolution to the Charity Commission, together with a statement of the trustees' reasons for passing it.

The Commission has power to direct the trustees to give public notice of the proposal and must take account of any valid representations which are made to it within 28 days of the public notice having been given. It can also direct the trustees to provide it with additional information or explanations about how they have reached their decision. The Commission must then decide whether or not it will concur with the trustees' decision to spend the permanent endowment property and may only do so if it is satisfied that:

  • implementing the trustees' resolution would accord with the spirit of the original gift; and
  • that the trustees have complied with their obligations regarding the passing of the resolution, including any requests to provide additional information and any requirement to give public notice.

Within three months of receiving the copy of the resolution (or, in a case where public notice must be given, three months from the date on which public notice is given) the Commission must notify the trustees whether or not it concurs with their decision. If it does, the resolution that the capital may be spent will take effect immediately.

Functional or investment permanent endowment property?

The Charity Commission makes a distinction between functional permanent endowment and investment permanent endowment in relation to the ability of the trustees to use the new statutory power. Functional permanent endowment is capital which is to be used for a specific purpose of a charity – such as school buildings, recreation grounds, museums or historic buildings. With functional permanent endowment, the distinction between capital and income often does not apply as there may not be any income. Investment permanent endowment is capital which is to be used to provide an income for the charity but the capital itself cannot be spent.

In its guidance entitled Permanent Endowment: What is it and when can it be spent (www.charitycommission.gov.uk/manage_your_charity/csd1347a.aspx) the Commission takes the view that generally the statutory power to spend permanent endowment will only apply to permanent endowment assets held as investment and not as functional assets unless there is a power, express or implied, to dispose of functional permanent endowment and not to replace it. The Commission's rationale for this appears to be twofold: (a) that the new statutory power only applies to income producing assets and (b) the sale of functional permanently endowed property will usually result in a change of purpose for which the property is held and this in normal circumstances would require a Scheme.

The only circumstance in which the Commission considers that the statutory power could be used is where trustees propose to sell functional permanent endowment while preserving the purpose of the trusts relating to that asset. This might be the case where, for example, in relation to the sale of permanently endowed land, the proceeds of sale could be regarded as investment permanent endowment to generate an income to be applied for the maintenance and upkeep of any retained permanently endowed land. The trustees could then resolve, under section 75A of the 1993 Act (and subject to the Commission's approval of the resolution), to expend the capital as well as the income of the sale proceeds for the upkeep and maintenance of the retained permanently endowed land. We have recently worked with a charity to achieve a result along just these lines.

It will be clear from the above that this issue is by no means straightforward and we understand that the Commission is still developing its policy in this area. If charity trustees have functional permanent endowment property that they wish to sell, it would be as well to approach the Charity Commission at an early stage to seek guidance on whether or not the Commission considers that the new statutory power would apply. However, in the light of the Commission's recent Strategic Review of its future role as a regulator and the fact that it will be doing much less "handholding" in the future it remains to be seen what input the Commission will be prepared to give prior to the trustees passing the necessary resolution.

An alternative to using the new statutory power

If it is not possible to use the new statutory power (for example in the case of functional permanent endowment where there will be a change of purpose), the Charity Commission may authorise the expenditure of permanently endowed property if the trustees demonstrate that it would be expedient in the interests of the charity. This will usually be subject to the requirement that it is replaced out of future income. Replacement (or recoupment) will be on the basis of a simple pound for pound repayment by the investment of annual payments for an agreed number of years out of the charity's income. The income from the invested annual payments does not have to be reinvested and can be used for the charity's purposes.

The Commission may, in some circumstances, authorise the expenditure of permanent endowment without the need for recoupment where, for example, the expenditure will provide long term value such as new or replacement property for the purposes of fulfilling the charity's objects. However, in our experience it is not always easy to predict what the Commission's approach will be in these circumstances.

For completeness, we should add that trustees can also apply to the Commission to use the total return approach to investments (i.e. expenditure of capital growth). However, the ramifications of this approach are controversial and outside the scope of this briefing.

Other considerations regarding the sale of permanently endowed land

In brief these include:

  • Power to sell

    The starting point will always be to look at the charity's governing document for the relevant power to sell and whether, leaving aside the question of permanent endowment, there are any restrictions on sale. In the absence of an express power the provisions of the Trusts of Land and Appointment of Trustees Act 1996 may assist. However, much will turn on whether the land is functional permanent endowment or investment permanent endowment and specialist advice will be essential.
  • Compliance with section 36 of the 1993 Act

    Once the trustees have the necessary authority to sell permanently endowed land they will need to comply with section 36(3) of the 1993 Act to ensure that the terms on which the land is sold are the best that can be reasonably obtained. This will involve obtaining and considering a surveyor's report and in certain circumstances public notice of the proposed sale must be given.
  • Selling land for development

    Please see our briefing entitled "Developing Charity Land: Opportunities and Pitfalls". Please click here.

Conclusion

There is now more flexibility for charity trustees to expend their permanently endowed assets. This may be an attractive proposition where trustees wish to free up monies to help finance a particular capital project or improve cash flow. It must be remembered, however, that trustees will need to balance the needs of the present beneficiaries of their charity with those of future beneficiaries: this is of course easy to state but less easy to put into practice.

A further important factor, as will be seen from this briefing, is that although the statutory power to sell permanent endowment was introduced five years ago, it seems that the Charity Commission is still developing its policy on the application of this power. For larger charities, therefore, in any particular case there may be a significant degree of uncertainty as to whether the Commission will consider that the statutory power applies at all to the permanent endowment asset in question and/or will concur with the trustees' resolution to expend that asset.

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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