What is an ex-gratia payment?
An ex-gratia payment is a payment which a charity has no legal obligation to make and which is not made as part of the charitable work of the charity but which the trustees wish to make. This includes a waiver by a charity to its right to receive money or property to which it is legally entitled but has not yet received, such as a legacy under a will.
These sorts of payment most commonly arise when gifts are made to charities in a will. For example, if a testator has provided instructions for a new will to be made during his or her lifetime which benefits a family member or other beneficiary and reduces the provision made for a charity in their current will but then dies before the will is executed, the charity trustees could elect to make an ex-gratia payment to match what the disappointed beneficiary would have received had the will been executed before the testator’s death. There is, of course, no legal obligation on the charity to make this payment as, despite the testator’s intentions, the final will was not executed; however, the trustees may consider that it would be morally wrong not to make a payment to the beneficiary.
This is different to a situation where a charity is faced with a legal claim in relation to a legacy in a will; for example, where a beneficiary brings a claim to challenge the validity of a will or seeks financial provision from an estate pursuant to the Inheritance (Provision for Family and Dependants) Act 1975. In these circumstances, if a charity reaches an agreement to settle the claim, this will not be an ex-gratia payment.
When can a charity make an ex-gratia payment?
Under the current law, a charity will always need to seek the approval of the Charity Commission before making an ex-gratia payment, however big or small that payment may be. A failure to do so will be a breach of trust as the trustees will be considered to be using charitable funds for non-charitable purposes and so trustees must currently ask the Charity Commission to authorise the payment on each occasion by providing evidence as to why they consider they are under a moral obligation to pay out charity funds.
What will change under the Charities Act 2022?
The new rules will allow charity trustees to make small ex-gratia payments without seeking prior approval from the Charity Commission. The size of ex-gratia payment which can be made under the new powers will depend on the gross income of the charity in its last financial year and will range from £1,000 for charities with a gross income of up to £25,000 to £20,000 for those charities bringing in a gross income in excess of £1 million. The guidance states that these thresholds apply per transaction and not per year, so a charity will be able to make more than one payment within a 12 month period providing that each individual payment does not exceed the threshold.
The freedom to make ex-gratia payments within the thresholds mentioned above will certainly provide charity trustees with more scope to use charitable funds to make payments in circumstances where they feel that all, or part of, a legacy or a gift made to the charity should be used to satisfy a moral obligation where no legal claim exists. This is an important distinction and our specialist Contentious Trusts and Probate Team can help to guide you if you find yourself in such a situation.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2022.