The Charity Commission has launched a consultation on draft regulations that will facilitate the total return approach to investment for charities with permanent endowment funds (P E Funds), without the need to obtain consent from the Commission. Approximately 14,000 charities hold P E Funds and will therefore be affected by this change.
The current position
As a general rule, trustees who invest P E Funds can spend only the income and not the capital generated from P E Funds. As a result, trustees are unable to adopt a total return approach to investment and therefore maximise the overall return, without the need to ensure a balance between income and capital growth. Currently, trustees wishing to operate a total return require an Order from the Commission to enable them do so.
The new position
The Trusts (Capital and Income) Act 2013, given Royal Assent on 31 March 2013, inserts two new sections into the Charities Act 2011 (s 104A and 104B). The Act gives trustees the power to pass a resolution opting for a total return approach to the investment of P E Funds and gives the Commission power to make regulations about the exercise of this power.
The regulations, as currently drafted, enable trustees to:
- adopt a total return approach to the investment of P E Funds, provided they are satisfied that to do so is in the best interests of the charity and they comply with the safeguards included in the regulations;
- accumulate income in respect of P E Funds (this power would not be subject to the usual limitation on the power of charity trustees to accumulate income to 21 years); and
- spend a limited amount of the capital from their P E Funds, provided they repay this capital at a rate and over a period that they decide is appropriate.
The Commission is not proposing a limit on the amount of unapplied total return that can be spent by the charity, but is proposing a limit of 10% on the expenditure of capital and is inviting views on both of these proposals.
Comment
This reform is part of the gradual relaxation of the rules governing P E Funds and a trend towards the Charity Commission taking a more flexible approach as to how charities use their assets. However, what is particular about this new regime is that it replaces the requirement to obtain consent from the Commission, with a self-regulatory system, and it will be interesting to see if trustees find that this change enables them to have greater discretion in their investment of P E Funds and a more effective use of their finances.
The deadline for responses to the consultation is 20th June and it is expected that trustees will be able to take advantage of the new regime in October 2013, when the Commission hopes to publish the final regulations.
This article was orginally published in the Investec newsletter: Charity Matters in June.
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