Charities Act 2022 - What should charities expect from the June 2023 implementation phase?

Phase 2 will introduce some new powers and refine existing statutory powers where a charity has permanent endowment, as defined in the Charities Act 2011 (the 2011 Act). That definition will change, becoming:

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

This streamlined definition will be closer, but not identical, to the traditional view of permanent endowment, as a fund where only the income can be spent. For the powers in the 2011 Act, it is the statutory definition, not the traditional meaning, which is relevant.

Tweaks to the power to spend capital of permanent endowment

Charities will continue to have statutory power to release restrictions on spending the capital of a permanent endowment fund, where the charity trustees are satisfied that the purposes of the fund could be carried out more effectively if the capital (or relevant portion) could be expended, rather than just the income.

However, the trigger for Charity Commission oversight will change from the current test, which depends upon the origin, income and size of the permanent endowment fund, to a single test of where the “market value” of the fund exceeds £25,000.

The new test ought to be simpler to apply, but will likely mean that use of the power for some funds with a low income will be brought within Commission oversight which currently would not be (although the changed position is probably how the rules were intended to work).

Phase 2 will also make some tweaks to the Commission oversight process, including reducing the period for the Commission to confirm agreement or objection to use of the power from 3 months to 60 days.

A new power to borrow from permanent endowment

Phase 2 will also introduce a new statutory power to borrow from permanent endowment. The new power will be available in addition to any express power available to charity trustees, but can be restricted or excluded by the trusts of a charity.

Broadly, the new statutory power will enable charity trustees to borrow up to 25% of the capital value of the permanent endowment fund, subject to an obligation to repay the capital within 20 years of draw-down.

Importantly, the test for use of the new power to borrow is wider than that for the power to spend the capital of the fund. To use the new power to borrow, the charity trustees will need to be satisfied that it is expedient for the amount to be borrowed in the light of both the purposes of the permanent endowment fund and the purposes of the charity – i.e. the test will allow the trustees to take a more expansive view, perhaps to free up funds for purposes of the charity which may be wider than the purposes of the permanent endowment fund.

There is no requirement for Commission oversight for exercising the new power to borrow from permanent endowment. However, when exercising the power the charity trustees must be satisfied that arrangements are in place for the amount borrowed to be repaid within 20 years. Trustees will be expected to account for their compliance with the repayment plan.

The trustees’ obligation under the statutory power is to recoup the capital borrowed. If at any time it appears to them that they will not be able to fulfil the arrangements to repay, or that the arrangements are not sufficient to ensure repayment, the trustees will have a duty to apply to the Commission for directions, which could include allowing longer for repayment, putting in place new repayment arrangements or directing that the amount need not be repaid. On the other hand, where charity trustees’ repayment arrangements have gone to plan, they will also be empowered (but not required) to add an amount for capital appreciation where they consider it appropriate to do so.

The Phase 2 changes will also empower trustees who have exercised the power to borrow to decide to release their obligation to repay (by an extension of the existing powers to spend capital), subject to Charity Commission oversight where the market value of the fund exceeds £25,000. To release the obligation to repay, the trustees will need to be satisfied that the purposes of the permanent endowment fund could be carried out more effectively if the obligation ceased to have effect.

In the current economic climate, the new power to borrow from permanent endowment could be very attractive to charity trustees in offering flexibility and a vital lifeline in freeing up funds. Charity trustees considering using the power will, however, have to be mindful of the obligations that come with use of the power, including for implementing and monitoring suitable repayment arrangements.

Total return investment, permanent endowment and social investments

Charities which have a total return approach in place in relation to a permanent endowment fund may be interested in a new power being introduced in Phase 2 to enable the fund to be used to make social investments with an expected negative (or uncertain) financial return. New regulations are due to be published which will govern use of the power.

Phase 2 will introduce some new powers and refine existing statutory powers where a charity has permanent endowment, as defined in the Charities Act 2011 (the 2011 Act). That definition will change, becoming:

The 2011 Act contains restrictions on dealing with charity land, designed to ensure that charities obtain the best terms reasonably obtainable for disposing of charity land and take sensible precautions before mortgaging charity land. That regime will be retained but some tweaks will be made to it in Phase 2 to bring some more clarity and to make the regime a little easier to apply.

This will include some welcome clarification of the scope of the regime, making clear that it applies only where the interest in land is held solely for or by a single charity, rather than for multiple beneficiaries. For example, if land is held by a charity as one of several tenants in common and the charity is disposing only of its share, that would be in scope (as the only interest is the charity’s); but where the charity is one of several tenants in common of land the entirety of which is being disposed of by the trustee of the land, that would not be in scope (as the interest being disposed of is not solely the charity’s).

Also welcome will be confirmation that charity trustees, officers and employees can provide advice on a disposal and/or mortgage of charity land, provided they are suitably qualified. Phase 2 will also introduce some more flexibility by widening the category of who can advise on dispositions of charity land (to be termed “designated advisers”).

It also aims to streamline the process which charity trustees must go through before making a disposal of charity land by removing the statutory requirement to advertise and also with changes to the prescribed content of the designated adviser’s report on the proposed disposition.

Some further tweaks to the regime were originally intended to be introduced in Phase 2, but have been put back to the third implementation due by the end of 2023. This is disappointing (and not obviously in line with the aims of the legislation) as it seems the regime will now be in a state of flux for the next few months.

Phase 2 will also expand the Charity Commission existing powers to direct charity name changes in certain circumstances.

In particular, Phase 2 will introduce a new power for the Charity Commission to direct a charity to stop using a working name if the Commission considers it too similar to another charity’s name or is offensive or misleading. This change was not consulted upon and has not been tested (there has not to date been a definition of “working name” in charity legislation), so it is difficult to gauge how it will work in practice – a charity’s working name can be fundamental to its branding and a direction to stop using it could have a very significant impact (e.g. “Comic Relief” is the working name of the charity Charity Projects).

The Commission will also have new powers to delay registration of a charity’s new name, and even to delay registration of a charity itself, if it considers the name unsuitable within the terms of the legislation.

Any use of these new powers will need to considered carefully to ensure it is proportionate given the serious impact use of the powers could have on a charity.