Deathbed gifts and conflicts of interest

The last charity law update (SJ 159/15) outlined the provisional proposals set out by the Law Commission in its consultation paper 'Technical issues in charity law'.
The consultation closed in early July. Stone
King submitted a response, as did the Charity Law Association. The responses received by the Law Commission will now be considered and
will inform its final recommendations.
The Commission expects to publish a final
report containing its recommendations and
a draft Bill at the end of 2016.

Third-party campaigners

Lord Hodgson has published a consultation/call
for evidence on the effect of the third-party campaigner rules leading up the 2015 general election, and how these might be improved.
While a blanket exemption for charities is not currently being proposed, there is the possibility
of bringing in a different, perhaps improved, 'intention' test, so that only campaigns that are intended to influence voter choice are caught.
This would automatically exclude most charities,
as this is rarely going to be the intention of the charity in mounting a campaign. The deadline for providing evidence is 31 July 2015. A copy of the call for views/evidence can be found in the consultations section of the government's website.

Investment management fees

In HMRC v University of Cambridge [2015] UKUT 0305 TCC, the Upper Tribunal (UT) ruled charities should be able to reclaim VAT on investment management fees. Charities pay fees to the managers of their investments, including VAT.
For a number of years charities have been in dispute with HMRC about whether they can reclaim some of those fees.

The UT ruled fees paid by Cambridge University to the investment managers of the university's endowment fund were for the benefit of its economic business, not part of a separate activity. The fees were therefore a component of the university's general overheads, on which it could recover the VAT in accordance with its partial exemption special method.

The UT dismissed arguments that the European Court of Justice (CJEU) intended the recovery of input tax related to non-economic activity to apply only to capital transactions. It considered that had the CJEU wished to draw a distinction between capital and income-raising activities, it would have stated so explicitly and made increasing capital a requirement. This is a welcome endorsement of the First-tier Tribunal's decision.

Charity Commission news

The Charity Commission has recently issued
its strategic plan and published its accounts and annual return. There has been a clear increase in the amount of compliance work undertaken by
the commission, which has been widely reported in the third-sector press, and the strategic plan signals that this is to continue. There is mention
of assistance to trustees in the strategic plan,
but this is clearly secondary to the compliance objective, which is not ideal, but understandable
in the current funding climate.

On the subject of compliance work,
the commission has just published an inquiry report into My Community UK, following the investigation of a complaint about possible conflicts of interest not being managed and the resulting unauthorised trustee benefits. When
the commission investigated, the concerns were
found to be of such significance that an inquiry was opened.

The conflicts of interest arose because of a close familial connection between the original and current trustees, and the payment of ex-trustees and family members for certain contracts. Although the contracts and services themselves were necessary, the conflicts had not been managed, but the charity has now adopted a conflicts of interest policy and has had payments approved by the Commission where appropriate, showing a clear understanding of its obligations going forward.

The commission also found a significant discrepancy between the bank accounts and
the accounts of the charity, which the charity explained was because the bank account had been used as a repository for funds from a fundraising scheme, which went to a coalition
of other charities. Sufficient evidence could not be found to account for £130,000 of the £180,000 discrepancy, and so the commission has suggested the trustees appoint some independent individuals to consider
whether they seek restitution of that amount.

This is a classic case of family members being involved in the setting up and running of a charity, without a full understanding of the responsibilities involved. We know that the commission is particularly alive to conflicts, and this is a positive outcome in that regard, as the charity now has
a policy and appears to understand its implementation, but the issue of the recovery
of funds remains. The commission itself will only intervene and seek restitution in very extreme circumstances - it is a decision for the trustees whether to take this action and, unfortunately,
it is rarely worth the cost. Presumably the commission will be monitoring the charity; one
of the flaws in the publication policy of the commission is that the public is unlikely to find
out the final outcome.

Other recent inquiry reports can be found on
the Charity Commission's website.

Donatio mortis causa

The remaining part of this update focuses on the recent legacy decision of the Court of Appeal in King v Chiltern Dog Rescue and Redwings Horse Sanctuary [2015] EWCA Civ 581, in which the
Court of Appeal overturned the High Court
ruling relating to donatio mortis causa (DMC).

In this case, Mrs Fairbrother made a will in 1998 leaving the bulk of her estate to seven animal charities. Mr King, her nephew, moved in with his aunt shortly after separating from his wife in 2007.

King stated that in 2010 his aunt gave him the title deeds to her unregistered property and told him: 'This will be yours when I go.' The nephew took the deeds and placed them in his wardrobe.
The aunt subsequently made three invalid wills attempting to leave the property to her nephew.

Fairbrother passed away in April 2011. The court held, at first instance, that there was a valid DMC and the property passed to her nephew on death. Alternatively, the court found that the nephew would be awarded £75,000 for reasonable financial provision from the aunt's estate. The decision
was appealed by the seven charities.

On 9 June 2015, the Court of Appeal permitted the appeal in part. It held that there was no valid DMC as the strict requirements were not satisfied:

1. Donor had to contemplate an impending death: not satisfied
   When the aunt had her conversation with
   her nephew she was 81, but there was no evidence that she was suffering from a specific illness. She could not be said to have been contemplating imminent death. She was merely approaching the end of her natural lifespan;

2. Donor had to make a gift that was conditional on death: not satisfied
   The aunt's statement indicated testamentary intent rather than a gift conditional on death. The three unsuccessful attempts to make a will were inconsistent if the property had been disposed of by a DMC; and

3. Donor had to deliver dominion over the subject matter of the gift to the recipient: satisfied
   When the aunt handed her nephew the title deeds to her unregistered property, this was sufficient to deliver dominion. It was not necessary for the nephew to deposit the title deeds at a bank or solicitor's office.

The Court of Appeal did not uphold the appeal
on reasonable financial provision. It held the award had been calculated by reference to the relevant factors and that the judge had not made any error of law or arrived at a figure outside the permissible bracket.

The DMC doctrine is an anomaly in English
law. It allows the deceased to bypass statutory safeguards afforded by the Statute of Frauds 1677, Wills Act 1837, and Law of Property Act 1925. This case is a clear reminder that DMCs will be kept within proper bounds and the courts will approach them with considerable caution.

Strict proof is required to show the conditions
of a DMC have been met, particularly the evidence from the recipient. The courts will not allow the DMC doctrine to be used to validate ineffective wills. Where an individual has had time to make a will (or a codicil) to dispose of property, it is unlikely that a DMC will be upheld.

Going forward, it is likely that the first requirement will be more stringent than ever.
A donor must not only anticipate death in the
near future, but it must be from a known cause.
It will not be sufficient to rely on age or frailty. Successful cases are likely to be measured in days rather than weeks. SJ

Sarah Clune, pictured, is an associate and Sarah Eden is a solicitor at Stone King