Does your charity hold permanent endowment and do you know what you can do with it?
We have come across a number of charities who hold assets on “permanent endowment” without realising that is what it is – and charities who believe they hold permanent endowment, when in fact that is not the case.
Special rules apply to permanent endowments which do not apply to other types of asset, so it is vital to identify them correctly, and to deal with them properly.
Identifying permanent endowment can be tricky. Broadly, any asset given to a charity without express power to spend the capital, is likely to be permanent endowment. This may be clear from the documents surrounding the gift: for example, a gift in a Will of a sum of money to be invested to produce an income to be spent on charitable purposes. Often it is property such as a village hall or playing field, to be used for a specific purpose. It is sometimes referred to as “specie”, “restricted”, “designated” or “functional land”. But frequently it is unclear from the documents, or lost in the mists of time, in which case and legal advice should be sought.
Why does it matter?
Problems arise when a charity wants to dispose of an asset which is held on permanent endowment. Unless it is to be replaced with a similar asset to be held on the same terms, it is not usually possible to dispose of it without Charity Commission consent.
Unexpected difficulties can also arise when a charity holding permanent endowment wants to change its constitution, for example, when a charitable trust wishes to become a company or CIO. Legal advice must be sought.
Small charities (with annual income under £1000, where the asset in question is worth less than £10,000) benefit from special rules making it easier to deal with permanent endowment.
Total return investment
New rules came into force last year enabling charities holding investments on permanent endowment to adopt a total return approach. Normally, only the income can be spent, not the proceeds of capital gains. The new rules mean that charity trustees are now able to spend some of the capital gains as well, so long as the required procedure is followed, and without certain limitations. This frees investment managers from the restrictions arising from the need to balance income and capital growth.