An important and unique feature of charities is that their assets may be held in different ways, depending on restrictions attached to those assets, typically imposed when a donor makes a gift on certain terms. These can be anything from gifts of buildings for specific uses, or perhaps funds to be invested and the income received to be used as a named bursary reward at a school.
There are various kinds of stipulations which donors may make, setting out how they wish their gift to be held and applied by a charity, and it is the wording which is important here. Some of these stipulations will create legally binding obligations on a charity to hold and apply the donations as specified by the donor, sometimes even requiring the fund or asset to have a specific name. Some such stipulations could state that property or assets are held:
The use of these words are very likely to create what is known as 'permanent endowment' Permanent endowment is generally any land, investment or other asset belonging to a charity, which the trustees cannot spend because of a restriction in the terms of the gift, or in a charity's governing document.
However, sometimes it will not be as clear cut as the examples above and permanent endowment can at times be difficult to identify, such as when there is a specific power to spend income (as in the bursary example above) but the terms of the gift are silent on whether trustees can also spend capital. Creating permanent endowment can therefore come down to the finer points of construction on the specific terms. As with most things, therefore, there are a number of grey areas about how permanent endowment may or may not be created. We would suggest that if in doubt, trustees should seek advice on this.
The key point is that if legally binding restrictions are imposed by donors, they will create restricted 'trust property', ie a charity's trustees will also be trustees of the trust holding the specific gift (and any income and capital returns arising on it). Trust property is separate from assets which can be used freely for that charity's objects, without restrictions as to the specific purposes they can be applied for, or for example how the charity can spend the funds.
In our experience, donors often do not appreciate the practical implications for a charity in creating permanent endowment restrictions, in terms of tying up the capital (sometimes held in investments or land) and limiting the amount of funding which can be applied on the intended purposes.
Thankfully there are statutory powers under the Charities Act 2011 to spend permanent endowment in some circumstances and other powers which can be used to consolidate smaller endowment funds to create larger funds which stand a better chance of creating a useful and stable income (or even to simply cut down on administration costs for all the small funds). However, the availability of these powers and in particular whether Charity Commission consent is needed depends on the size of the fund and they are not always easy to apply in practice (eg consultation with donors may be required).
As a reminder, in considering their duty to hold the trust assets, and whether or not there is an argument for exercising statutory powers to free up assets, trustees of charities with permanent endowment should remember their duty to be fair in their management of it between the needs of current beneficiaries for income and the needs of future beneficiaries for capital.
We are always pleased to assist charities in identifying and considering the use of permanently endowed assets, ensuring that a charity is best equipped to meet its charitable objects. If you have any questions please do get in touch. More information can also be found on our free service OnStream.