Charities Act 2022: Spring Update

The second tranche of changes to charity law brought about by the Charities Act 2022 are due to come into effect imminently. In this article, we explore what the major changes will be and what they will mean in practice for charity trustees.

For a quick recap of the changes which have already been brought into effect, please see our previous article here.

What’s happened so far?

The Charities Act 2022 (the Act) is a piece of amending legislation which amends and updates certain provisions of the Charities Act 2011. It received Royal Assent in February 2022, however its contents have been coming into force gradually.

Why was it needed?

The Act seeks to reform certain aspects of charity law in order to simplify the administrative burden trustees and senior management often face. For a detailed introduction to the Act, please see our article here, or access our quick and free webinar here.

What are the changes coming into effect in spring 2023?

A number of changes are coming into effect in spring 2023. These include changes to the following areas of charity law:

1. Disposing of charity land – for more detail on these changes, please see our article.
2. Using permanent endowment.
3. Use of charity names.

Permanent Endowment

Broadly speaking, permanent endowment is land or property (including cash or investments) which is meant to be held by a charity and not spent.

On a slightly more technical level, it is property held by a charity on the basis that the trustees may only spend the income from the property, and not the capital (investment permanent endowment), or it is property which does not produce an income but can only be used by a charity to pursue its purposes, for example, a village hall (functional permanent endowment).

The rules around what you can and cannot do with permanent endowment are complex and depend on the specific trusts and restrictions that affect the property in question. If you are unsure about your powers in respect of any proposal, we would always recommend seeking specialist advice from a charity law specialist.

Definition

There is a statutory definition of “permanent endowment” in the Charities Act 2011. However, that definition is only relevant to the specific powers set out in that Act. It is not a universal definition of permanent endowment and does not apply to functional permanent endowment.

Once implemented, section 9 of the Act will amend the statutory definition of “permanent endowment”. The reason for this is not to seek to provide a universal and comprehensive definition of the term, but rather to remove ambiguity within the existing definition and make it clear that any fund held subject to a restriction on expenditure of capital is caught:

“For the purposes of this Act, property is ‘permanent endowment’ if it is subject to a restriction on being expended which distinguishes between income and capital.”

Charity trustees will be able to make use of the various statutory powers in the Charities Act 2011 in respect of any property that falls within this new definition. Importantly, the reformulated definition will mean that the following types of property are not caught within the definition (meaning that the statutory powers are not available to that property):

• Special trust property, for example land or a fund that must be used for a specific charitable purpose.
• Funds held subject to a restriction that only a certain percentage of it (whether capital or income) may be spent each year.

Releasing Permanent Endowment & New Statutory Powers

In respect of any permanent endowment that falls within the new statutory definition, there will be broader powers to release restrictions affecting it. The relevant sections of the Charities Act 2011 are sections 281 and 282. These set out certain circumstances in which it is possible to pass resolutions to spend the capital from a permanent endowment fund. The Act will make a number of changes to simplify the rules, in particular:

• The statutory powers will be available to all types of charities (not just unincorporated charities).
• The power intended for smaller charities (which does not require an application to the Charity Commission) will be simplified so that it is available in respect of any permanent endowment fund that has a value of £25,000 or more (this replaces the current complex rules requiring assessment of both capital value, income and whether or not the fund was “entirely given” by a particular donor or donors).

New statutory powers are also being introduced, notably to permit trustees to borrow up to 25% of the value of the permanent endowment if they repay it within 20 years, without needing to seek specific authority to do so (subject to meeting certain requirements). In addition, trustees who have adopted a total return approach will also be able to release permanent endowment to make social investments with a negative or uncertain financial return (and new regulations are expected to be made by the Charity Commission to govern this).

Charity names

The Act will introduce some interesting new powers for the Commission to rely upon in relation to charity names. By way of example, the Commission will be able to direct a charity to stop using a working name (in addition to its current power to require a charity to change its formal name), and to direct a charity to change its formal or working name where it is too similar to the name of another charity.

The changes also include the power for the Commission to direct the change of name of an exempt charity (i.e. a charity that is exempt from the requirement to be registered, such as an Academy Trust Company or a social housing charity that is established as a Community Benefit Society), and (in relation to non-exempt charities) the power to delay the registration of a charity where a change of name direction has been made.

Charities will, however, have the right to appeal against a direction by the Commission not to use a working name. The Companies Act 2006 will also be amended so that the directors of a company may resolve to change the name of the charitable company (rather than the members) where the Commission has made a change of name direction.

Conclusion

The changes outlined above will be of particular importance to trustees of permanently endowed charities.

The Charity Commission has announced that it will be updating its guidance and publishing new guidance for charity trustees which will cover the changes coming into effect. We would recommend that trustees take some time to explore the changes and the guidance (once it is published) and consider whether the new rules surrounding permanent endowment may be of benefit to their charities. Do also keep an eye on our website for further updates.

The Birketts view

The changes to the law surrounding permanent endowment represent most of the recommendations made by the Law Commission in its report on ‘Technical Issues in Charity Law’ published in 2017, which was the catalyst for the current charity law reform that is underway.

Permanent endowment is a highly technical area of charity law and one which will benefit from the important clarifications and flexibility being introduced. Many charities hold permanent endowment in one form or another, for example charities often benefit from a gift of land or a substantial donation where a donor wished to provide the charity with a lasting means of income.

The new rules will go some way in giving trustees greater flexibility when it comes to dealing with their permanent endowment – a change which may assist charities struggling to meet financial liabilities at present or those which wish to make social investments going forward. However, it is always important to consider your legal duties as charity trustees and take all decisions in the best interests of your charity.

If you would like advice on any of the changes being implemented and how they affect your charity, please do get in touch with Liz Brownsell (Head of Charities) or Amy Bradburne (Solicitor, Charities Team).