Charities | New powers for investment of permanent endowment

‘Permanent endowment’ refers to charity funds and property that the trustees cannot spend as income. If it is cash, it must be invested to produce income to be spent on the charity’s aims. ?Of the 162,000 charities on the register, ?we are only aware of approximately 14,000 which have permanent endowment.

Only charities can have permanent endowment. Private trusts can have successive interests but at some point the property will cease to be held on trust. The duty of private trustees is to be even handed in the way they treat current and future beneficiaries. The equivalent trustees of charities that have endowment funds held on a permanent trust for investment (capital) must have regard to the furtherance of the charitable purposes now and in the future.

Under trust law particular types of investment returns are added to the trust for application (income) and particular types of investment return should be added to the trust for investment (capital). Trustees ?cannot normally spend permanent endowment capital without the Charity Commission’s authority.

Investment

‘Total return’ describes a general investment approach that charities can adopt to manage their investments. Under this approach, the form in which investment return is received (for example, income, dividend or capital growth) does not matter. Instead, investments are managed to make the most of the total investment return they generate. Investments are made to give the best performance in terms of their overall return, rather than on investments which will give the ‘right’ balance between capital growth and income.

The trustees can allocate whatever portion of the total return they consider appropriate as income – this can be ?spent in furthering the aims of the charity. The balance remaining is carried forward ?as unapplied total return and invested ?as capital.

Currently the main way trustees are authorised to take a total return approach to investment is by an order of the commission. Section 4 of the Trust (Capital and Income) Act 2013, when it is commenced, will introduce new sections of the Charities Act 2011 which will give trustees the power to adopt such an approach without the need to apply to the commission. Instead the commission will make regulations regarding the conduct of such an approach.

The commission will shortly be consulting on the draft regulations it is proposing to make. These are designed to introduce some additional flexibility to the present system. In particular, provision could be made for part of the capital to be spent subject to it being repaid. It is also proposed that a certain amount of income can be permanently allocated to the capital rather than just being carried forward as unapplied total return. These proposed regulations take into account some of ?the criticisms about how the present ?system works.

There are already powers for trustees to spend permanent endowment in appropriate circumstances (sections 281-284 of the Charities Act 2011). The section 104A power to ?invest on a total return basis will be for charities which wish to preserve their permanent endowment while investing for the best return.

There have been concerns about the real value of permanent endowment being eroded if insufficient is allocated to the capital value. However, trustees can already with the consent of the commission spend permanent endowment if they are satisfied that the purposes for which the fund is established could be carried out more effectively if the capital as well as income is spent.

If you have views on this, please respond to the consultation, which will go live on the commission’s website shortly.