Solicitor Harriet Parfitt, in our Charities & Education team, looks at what the changes means for the charity sector.
In Autumn 2017, the Law Commission (the Commission) issued a report entitled ‘Technical issues in Charity Law’, which proposed various recommendations to the legal framework governing non-for-profits. Seven years on and the Charities Act 2022 (the Act) is soon to be enacted in full, aiming to deliver wide-ranging reform to the sector.
What’s changed?
The provisions in the Act have been effected through a series of commencement regulations, with some minor provisions yet to come into force. The amendments brought about by the Act to the existing law are sweeping, from new powers to amend constitutional documents, to simplified procedures for disposals of charity land.
Below we summarise some of these key changes, of which both charities and trustees alike must now be aware, to ensure their policies and governance, financial strategy and trustee board remain compliant.
Cy-près and legacy donations
In the event of an “initially failed” donation, funds designated for one purpose may be able to transfer to another related charitable purpose, being a purpose as close as possible to the original purpose, under the doctrine of cy-près. This doctrine was accepted prior to the Act, however the circumstances in which it can be applied have now widened considerably. Significantly, the Act now enables trustees to apply “initially failed” donations cy-près to a related charitable purpose without the need to obtain a formal cy-près scheme.[1]
Another comparable need to transfer funds arose prior to the Act, where bequests were made in a will in respect of an institution which ceased to exist, having been merged with another institution, at the date of death of the testator. Often, this gift would lapse, unless the merged charity had retained the former ‘shell’ charity for the sole purpose of catching these legacy donations. However, the wording of section 311 of the Act (which determines whether a testator would have intended to make the gift regardless of the charity’s status) has now been interpreted further, meaning that a gift may now seamlessly transfer to the new entity, provided that the merger has been registered with the Commission.[2]
These changes should help reduce the cost and time taken to ensure that assets reach their intended organisation, following any “initially failed” donations or legacy bequests.
Permanent endowment and investment powers
Previously, any investment or functional assets held by, or on behalf of, a charity, and which were designated as eternal property of the charity, constituted permanent endowment, and could not be spent by trustees.[3] This, of course, often proved not to be in the best interests of many charities where their overwhelming need was current, and not in the future. Moreover, the investment powers afforded to trustees were narrow, as they were required to invest the organisation’s portfolio based on the value of any return(s) only. Lastly, releasing a permanent endowment, particularly without approval or non-objection from the Commission, was also heavily restricted.
Now, trustees will be able to borrow a sum of up to 25% of the value of their permanent endowment funds, without the Commission’s approval. Trustees, where appropriate, have also been afforded broader investment rights,[4] which have also been bolstered by recent case law developments.[5] Finally, the Act has simplified the rules around releasing permanent endowment too – meaning that the power to release funds has been extended to corporate charities, up to a value of £25,000.[6]
Combined, these changes should reduce bureaucracy in any commercial decisions by a charity, and improve the financial efficiency of its investments.
Trustees
As stated by the Law Commission, “charities depend on people”.[7] Notwithstanding this, the time, cost, and risk associated with the critical role of a trustee can often deter individuals from volunteering their time and resources, to an unpaid role. The Act has attempted to ameliorate these concerns by shifting the financial burden away from trustees.
Firstly, trustees are now eligible for compensation for any expenses reasonably and necessarily incurred in fulfilling their duties on behalf of the charity.[8] Secondly, trustees can now also be renumerated for any personal supply of goods to a charity (this provision previously applied to the personal supply of services only).[9]
These changes, amongst others, should equip charities to compensate their trustees efficiently and effectively, increasing the accessibility of their role. This exercise, of course, must be balanced with fiduciary duties of any trustee, and so several safeguards, including reporting obligations and internal financial controls, are in place to ensure that these funds are distributed properly and in the best interests of the charity.
What’s to come?
Ex gratia payments
The Act provides a further power for trustees to make ex gratia transfers without requiring permission from the Commission. However, these changes have now been postponed, after the need to consider an exemption for galleries and museums was identified. Under this revised power, museums and galleries would have discretion to return objects and artefacts to their country of origin, should they feel compelled to do so (for moral reasons, for example). However, this conflicts directly with previous legislation, which obliges museums and galleries to ensure these objects and artefacts remain within their relevant collection(s).[10] The proposed change is currently under consultation by the Department for Media, Culture and Sport, and an outcome is due in Autumn 2024.
Land owned by universities and schools
Historically, the process behind the disposal of land or mortgages by the University of Oxford and Cambridge, their colleges, and Eton and Winchester schools has been governed by the complex and (almost) centennial Universities and College Estates Act 1925. However, this position too will now be revised by the Act via consequential amendments, meaning those institutions will be able to act as an absolute owner when carrying out any relevant conveyancing transaction.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
[1] By passing a board resolution. See section 7, Charities Act 2022.
[2] Further updated guidance can be found via the Commission website: https://www.gov.uk/government/publications/making-mergers-work-helping-you-succeed.
[3] Except where trustees were dealing with de minimus funds.
[4] Section 284A and B, Charities Act 2022.
[5] Butler-Sloss & Ors v The Charity Commission for England and Wales & Anor [2022] EWHC 974 (Ch) (29 April 2022),
[6] Section 10, Charities Act 2022.
[7] The Law Commission, Technical Issues in Charity Law < Law Commission No. 375 Technical Issues in Charity Law>.
[8] Further updated guidance on renumeration can be found via the Commission website: Trustee expenses and payments (CC11) - GOV.UK (www.gov.uk); Payments to charity trustees: what the rules are - GOV.UK (www.gov.uk).
[9] Section 30, Charities Act 2022.
[10] See s3 British Museum Act 1963 and s6 Museums and Galleries Act 1992.
