The Charities Act 2022 and Restricted Funds – what has changed?

The Charities Act 2022 comes into force in several stages from 31 October 2022. The idea of a staged timetable up to the end of 2023 is to give charities time to digest the changes and prepare for any that might affect them. One of the key changes in the Act relates to how charities use certain types of funds – restricted funds and permanent endowment funds.

As a quick refresher:

  • Restricted funds are those where the charity has to spend the funds in line with a particular purpose or project, usually specified by the donor or a fundraising campaign for a specific project or activity.
  • Permanent endowment funds are less common, but the capital of these funds is to be protected and only income generated from it can be spent by the charity. Some permanent endowment funds have further restrictions on how the income is spent, but for many charities, the fund is invested for the long term, with the income from those investments being used for charitable activities. The idea is to generate a stable long term source of funding for the charity.

What is the challenge with permanent endowment funds?

Many charities find that these funds are difficult to spend down and in some cases can build up over the long term with no way for the charity to effectively utilise them. Some restricted funds, for example, may have such a narrow scope in their purpose as to be effectively redundant, or others may become outdated and relate to activities a charity no longer undertakes. In other cases, a fundraising appeal may get stalled short of its target and leave the funds unable to be utilised.

Some Permanent funds also have unnecessary restrictions on their use or even the costs of managing such funds become impractical compared to the income generated.

On occasions, charities need access to cash or resources quickly and permanent endowment funds can be inaccessible in times of need, such as during the COVID-19 pandemic when initial funding was short or activities curtailed.

We also often find that some funds, particularly endowment funds, have long legacies and original documents or agreements to their use are unclear or unable to be located. This can cause difficulty in a charity knowing how it can utilise the income or capital.

What changes does the new Charities Act introduce?

Firstly, there are amendments in force from October 2022 relating to where fundraising appeals have failed to hit targets or older appeals have funds that cannot be used up. The new rules offer more flexibility in using these funds rather than trying to contact donors from some time ago or immediately returning funds.

Such funds can be applied ‘cy-pres’ – which means applied to a closely related charitable purpose or similar appeal. In the past, charities had to wait six months at least before using funds in this manner, but this rule will now be removed.

Sections 6 and 7 deal with this area and should be read carefully before applying to change the use of any funds in different circumstances. For example, where the amount exceeds £1,000, there is a requirement to gain the Commission’s consent.

Overall, this means that Charities will now hopefully have more flexibility in using some restricted funds that have ‘stalled’ or become difficult to apply to current activities.

More guidance on how to react to the types of issues raised above is available from the fundraising regulator here.

How about Permanent Endowment Funds?

The changes for these funds came into effect on 14 June 2023. Previously charities could use statutory powers to apply a change of purpose for endowment funds if they had income from these funds of £1,000 or less and a market value of £10,000 or less. In most cases, this would rule out the majority of older permanent endowments. For larger funds, the charity could apply to the Charity Commission to change the purpose, but this often took some time and acceptance was uncertain as the process was considered complicated.

The new powers will mean that statutory powers can be used for funds with a market value up to £25,000, which increases the range available and simplifies the process.

For larger funds, an application can be made to the Charity Commission as before. The Charity Commission must now respond within 60 days rather than 90 days.

There are also welcome changes that increase the flexibility of these funds with a new statutory power that enables a charity to ‘borrow’ up to 25% of the value of a permanent endowment provided that borrowing is repaid within 20 years. This can be a useful new tool where cash needs are more urgent for Charities and appears to be a sensible approach to protecting the longer term endowment.

In addition, permanent endowments using a total return policy can make more varied social investments. Previously these were not considered due to a risk of a negative return. This also adds to the variety of investments and activities available.

What should you be considering as a result of these changes?

At the current time it’s wise to review your funds overall and highlight any such permanent endowments or older restricted funds that may benefit from use of the new powers. Discussions would be needed at board level to approve any applications or changes and all such discussions should be minuted. Consideration should also be given as to how they might be used to further the charity’s aims and activities whilst keeping in mind the various rules and process noted above and in the following link here.

In conclusion, the new powers are a welcome boost to the sector in keeping activities and funds well managed and applied in the best interest of your charity.

If there is anything in this article that you would like to discuss or find out more about, please contact our Charities team using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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