A guest article by Alexandra Steffensen, Senior Associate Solicitor, Stone King LLP

Turbulent financial times usually lead to increased pressure on a charity’s core internal procedures, as staff leave, IT systems become outdated, and as a result record keeping may slip. Even if your charity is running smoothly, all trustees in compliance with their duty to act prudently, need to make sure that their charity’s assets are legally controlled by the charity, any restrictions imposed on those assets are being accurately complied with, and robust financial controls are in place. Even large charities can get into trouble for improperly applying restricted funds, as a recent Charity Commission inquiry into a major disability charity showed. This charity’s accounts stated that “due to historically poor IT systems and finance processes, the charity was not able to identify all eligible expenditure related to specific restricted funds,” and seems to have applied restricted funds alongside its reserves.

With a bumpy financial ride likely to continue, as part of a wider financial planning exercise, many trustees will, in addition to trying to comply with their duties above, be having to focus on how accessible their charity’s assets are likely to be should they need to be liquidated to support the charity. The Charity Commission’s guidance on “Managing financial difficulties and insolvency in charities” CC12, explores this further.

Below we are going to consider restrictions on funds, and some of the options available for removing restrictions or re-directing funds. However, it is equally important to review the trusts governing any land you may wish to sell.

Are your funds actually restricted?

“Restricted” tends to get used as shorthand for what are technically many different arrangements which fall within the objects of the charity. The most common examples are as follows:

1. Charity trustees allocate unrestricted income for a particular purpose (for example to repair the roof) this allocation, which might be necessary for prudent planning, is an allocation of the trustees and can therefore be re-allocated if they choose to. These are technically designated funds and so can be undesignated.

2. Funds may be given by donors subject to a non-binding letter of wishes. The trustees may therefore decide it is in the best interests of the charity not to follow these wishes, making the funds unrestricted. However, if you are considering taking such a decision, we would recommend that you consider engagement with living donors and consider whether there would be any reputational risk to the charity.

1 and 2 above are technically not “restricted” funds and can be spent.

3. If the charity fundraises from the public to fix the roof, the funds raised under the fundraising appeal will be restricted to whatever purpose the charity told the donors it was going to use them for. This can create funds that are narrowly restricted to a single purpose, unless the appeal requests are well drafted and allow for unused funds to be re-directed to the charity’s general funds by the trustees.

There are special provisions of the Charities Act 2011 (as amended) (the “Act”) for changing the purposes of funds raised from the public in an appeal, which we are not going to explore further here.

4. Alternatively, funds may be given by a donor(s) on specific trusts again, for example to fix the roof. These funds may allow the trustees to either:
   1. Spend all the funds given for the desired purposes (restricted income funds);
   2. Spend the income, and spend the capital if necessary (expendable endowment funds); or
   3. Spend the income only, whilst the capital has to be protected and invested (permanent endowment funds).

The options available to de-restrict endowment funds primarily depend on their capital and income value, and we explore these more fully below because, whether you can spend some or all of the funds depends on getting the analysis above right; it is crucial to first assess who any “restricted” funds were given by and whether they are governed by a separate trust.

If the charity has numerous small funds, it is worth, as a minimum, creating a spreadsheet with details of the governing document, who the trustees are, and the value of the capital and income of the fund, and then trying to assess whether it is permanent endowment or not. You may need professional help assessing the position, but you will save time and money by undertaking an initial review yourself and gathering any relevant papers together into one place.

Once this analysis is complete, it will be possible to assess any gaps in your records / knowledge and ascertain whether any funds can be de-restricted, and the likely time frame and complexity of this process. We lay out below a brief review of the main options available.

Powers to spend permanently endowed funds under the Act

First, check the value of the capital and income of the fund, and assess its “market value” in line with the Act and Charity Commission guidance. If there has been any previous borrowing from the fund, this will also need to be assessed in accordance with the Act.

1. If the market value of the fund is £25,000 or less, then the trustees can resolve to spend some or all of the permanently endowed fund if they are satisfied that the purposes of the fund charity can be carried out more effectively if the capital can be spent in addition to the income for those purposes of the fund. 

It is normally possible to create a justifiable case where the fund has been in existence for some significant period of time, and the income being generated is no longer sufficient to be administered in an economically efficient manner. The trustees’ resolution should refer to section 281 of the Act, and it is effective immediately on its being passed. This power is, in our experience, helpful in spending out small funds often given for scholarships, prizes, church flowers etc.

• If the market value of the fund is over £25,000, then the trustees can still pass a resolution to spend some or all of the permanently endowed fund (this time under section 282 of the Act, which again you should include reference to in the resolution). But this resolution will only take effect if the Charity Commission either concurs with, or doesn’t reply to, the trustees’ resolution within 60 days of the resolution being received by them, (or if the trustees are required by the Commission to provide further information, or give notice, within the extended timeframes specified by the Act for these actions).

As part of this process, the trustees must also submit a statement of reasons, in addition to the resolution, to the Charity Commission. The Commission’s guidance on spending permanent endowment lists what they expect such a statement to cover (for example: the original wishes of the donor, needs of current beneficiaries, financial position of the fund, and changes to the social and economic environment in which the charity operates, etc.). These latter two points will be particularly relevant if the charity is facing difficult financial decisions.

The Charity Commission recommends that trustees follow their guidance on making a formal decision (CC27), when deciding how to approach the resolutions above.

Finally, these provisions only allow permanently endowed funds to be spent on the existing purposes of the fund, they do not allow the funds to be redirected to a different purpose.

Powers to change the purposes under the Act

It may also be possible to change the purposes of such funds using the powers available under s.280A of the Act or, if necessary, to apply for a Charity Commission Scheme, but that is outside the scope of this article.

Other options if you cannot de-restrict permanently endowed funds

Where it is not possible to de-restrict permanently endowed funds, it may be possible to increase the amount which can be spent from the fund by adopting a total return approach, or to borrow from the capital on the basis that it is repaid or treated as a social investment.

However, it is worth noting that all of the above options inevitably take time to implement, particularly where they involve engagement with the Charity Commission to achieve them, or public notice, and so, whilst the Commission will in our experience try and be helpful in a crisis, it is always better to review these matters before you critically need the money. In addition, if trustees think the charity is becoming insolvent we would recommend that they obtain suitable professional advice as soon as possible.

The law and practice provided in this article is for guidance only. It should not be construed or relied upon as legal advice in relation to a specific set of instructions.

Alexandra Steffensen

Senior Associate Solicitor, Stone King LLP