The Charity Commission has reported that is encouraged by the use by trustees’ of professional advice when considering the legal status of their charity’s permanent endowment (PE) funds arising from a review of 60 charities with an income of over £500,000 whose accounts showed a reduction in the level of PE funds on the previous year.
The Charity Commission looked at this because their concern that as public funding and fundraised income becomes ever more difficult in the current economic climate, charities might be tempted to spend the capital element of their PE without legal authority.
PE funds are of course capital funds held in trust for the long term benefit of the charity often as investments or property.
These can’t normally be spent without prior authorisation from the Charity Commission. The review found that 6 had reclassified some or all of their PE funds as restricted or unrestricted funds, both of which are easier for charities to spend, having taken professional advice. The accounts of the remaining 54 charities included in the report explained that the reduction in their PE funds was either due to property depreciation, investment losses or the application of the total return approach which we discussed in our recent newsletter.
The key point here is charities are not able to spend the underlying capital without prior authorisation. Rather, the income arising must be applied for the purpose for which those funds were created. We have on a number of occasions assisted charities to obtain approval from the Charity Commission to release and spend those funds either for the same or similar purposes.
For example, the Charity Commission approved the release of PE funds to unrestricted reserves, or to a restricted fund for the nearest relevant purpose where the original purpose is no longer relevant in today’s society. Thus, a permanent endowment fund created in the early 1900s and held by an independent school to provide for the college fees of former pupils taking clerical orders hadn’t being claimed in a number of years and were just accumulating. Similarly, the value of a PE fund created for another purpose had fallen in real terms over a very long period of time so that the income yield had fallen to a negligible amount. The Charity Commission gave approval in both cases for the residual capital to be released and spent for the nearest current purpose to the original.
If this is something you would like to discuss further, please do not hesitate to contact Peter Taaffe.