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Contents
This guidance is about how to make decisions about investing charity funds.
All charities are able to invest, and investments can be a major source of funding for them. However, investing also exposes charities to risks which, if not properly managed, can affect not just the charity itself but the public's trust and confidence in the sector more generally. Because of this, it's important that charities manage these risks and operate within the law.
As the regulator of charities in England and Wales, we have produced this guidance to support charities and their trustees in confidently making decisions about investments that comply with their duties.
On one level, the answer is quite simple - they invest in order to achieve a return so they can further their charity's aims. Usually, this means the best financial return within the level of risk considered to be acceptable - in this guidance we refer to this as 'financial investment'.
However, charities are increasingly interested in how they can invest to directly further their aims as well as achieve a financial return - in this guidance we refer to this as 'programme related investment'.
Where the investment does not fit wholly within either of these categories, charities can make 'mixed motive investments' if their trustees decide that this is in the charity's best interests.
These are all valid investment approaches for charities, although different considerations and legal duties apply.
This guidance sets out the legal and good practice framework for the investment of charity funds. It covers:
Trustees and those who make decisions on behalf of trustees about a charity's investments and assets should use this guidance as a tool to help them make confident, informed decisions and publicly to report on those decisions.
The duties set out in this guidance are based on the law relating to Trust Law, but directors of charitable companies (who are charity trustees) are likely to have similar duties when investing their charity's assets.
Section B 'Executive summary' provides a brief overview of the investment of charitable funds and the legal requirements and good practice recommendations that apply.
Charities that only invest cash, perhaps those that receive all their income through grants, are likely to find section B and section I 'Cash deposits' to be of help. The other sections in this guidance provide detail for charities that are interested in a wider range of investments.
In this guidance, where we use 'must', we mean it is a specific legal requirement affecting trustees or a charity. Trustees must comply with these requirements. To help you easily identify those sections which contain a legal requirement, we have used the symbol under the question at the head of the section.
We use 'should' for items we regard as good practice, but for which there is no specific legal requirement. Trustees should follow the good practice guidance unless there is a good reason not to.
We also offer less formal advice and recommendations that trustees may find helpful.
Trustees are responsible for making decisions about their charity's investments. We have written this guidance to support trustees in making these decisions so that they can comply with their duties. While it cannot provide specific investment or legal advice, trustees who follow this guidance should be able to support the decisions they have taken.
The guidance is complemented by Legal underpinning: Charities and investment matters, which explains in more detail the law and case law on investment matters for charities.
This guidance replaces our previous publications Investment of Charitable Funds: basic principles (CC14) (February 2004), Investment of Charitable Funds: Detailed guidance (February 2003) and Charities and Social Investment (2003). It is a complete rewrite in a new format.
Charities invest so that they can further their charitable aims.
They can invest in a number of ways to achieve their aims, and there are specific legal duties and decision making processes attached to each.
If trustees have considered the relevant issues, taken advice where appropriate and reached a reasonable decision, they are unlikely to be criticised for their decisions or adopting a particular investment policy.
In this guidance we have concentrated on financial investment and programme related investment. We have also included some guidance on mixed motive investment (section K). This is another approach to investing and is an emerging area of interest for some charities.
Financial investment
The purpose of financial investment is to yield the best financial return within the level of risk considered to be acceptable - this return can then be spent on the charity's aims.
In order to act within the law, trustees must:
We also recommend that trustees should:
An example of financial investments
A medium sized local arts charity receives its income mainly from grants and ticket sales. Surplus funds not needed in the short or medium term are invested in a common investment fund designed for longer term investment, while grants received in advance are invested on the money market. The charity also owns a block of garages which it rents out at the market rate. Some or all of the return on these investments is spent each year on the charity's beneficiaries.
Programme related investment (PRI)
The aim of a PRI is to use a charity's assets directly to further its aims in a way that may also produce some financial return for the charity. PRI is different from financial investment in that the justification for making a PRI is to further the charity's aims: this means that charities are not bound by the principles or law for investment (see section J).
In order to fulfil their duties and act within the law, trustees:
An example of PRI
A charity that works to help and advise the unemployed usually makes grants to charities and other organisations that help unemployed people back into work. However, it has decided in certain cases to make loans instead of grants. It expects that loans will be repaid, potentially with some interest, enabling the charity to spread the work it does among more beneficiaries.
Where an investment cannot be wholly justified as either a financial investment or a PRI, it may be possible to justify it as a mixed motive investment. Considerations for trustees should include:
Trustees have to comply with certain legal requirements and duties when investing their charity's assets for a financial return. This section explains what they are and how charities can work within them, and also sets out some matters of good practice.
The short answer
Yes. All charities can make financial investments. A charity's specific powers of investment may depend on its constitutional form (for example, whether a charity is unincorporated or a company). In addition, a charity's governing document may place some conditions or limitations on the use of any power of investment.
In more detail
Most unincorporated charities have a 'general power of investment'. This allows trustees to invest the charity's funds in any asset that is specifically intended to maintain and increase its value and/or produce a financial return. When using this power, trustees must comply with the duties described in section C2.
The governing document may set out additional provisions, restrictions or exclusions on the types of investments a charity can make; these may take priority over, or affect, the general power of investment.
For more information about investment powers, restrictions and exclusions, see Legal underpinnings: Charities and investment matters (part 1).
The investment powers available to trustees of charitable companies are normally set out in its articles of association and are usually similar to the general power of investment referred to above. Where a charitable company acts as a trustee of an unincorporated charity, the 'general power of investment' applies.
Trustees have overall responsibility for the investment of a charity's funds. This means that they have a crucial role to play in making strategic decisions about how to use a charity's assets to achieve its aims. However, trustees may choose to delegate day to day decisions about investments to a third party.
Trustees must:
If trustees can demonstrate that they have considered the relevant issues, taken advice where appropriate and reached a reasonable decision, they are unlikely to be criticised for their decisions, or for adopting a particular policy.
These legal requirements do not apply to trustees of charitable companies. However, they should adopt these principles as good practice when making investment decisions.
For more information about trustee's duties, see Legal underpinnings: Charities and investment matters (Part1, section 3).
Yes. Trustees of any charity can decide to invest ethically, even if the investment might provide a lower rate of return than an alternative investment. Ethical investment means investing in a way that reflects a charity's values and ethos and does not run counter to its aims. However, a charity's trustees must be able to justify why it is in the charity's best interests to invest in this way. The law permits the following reasons:
Trustees must ensure that any decision that they take about adopting an ethical investment approach can be justified within the criteria above. They must be clear about the reasons why certain companies or sectors are excluded or included. Trustees should also evaluate the effect of any proposed policy on potential investment returns and balance any risk of lower returns against the risk of alienating support or damage to reputation. This cannot be an exact calculation but trustees will have to assess the risk to their charity.
An ethical investment approach may involve one or a combination of the following approaches:
Examples of ethical investment strategies
1 An environmental charity with aims to protect wildlife and the environment decides to adopt an ethical investment policy. It decides to avoid investing in companies that have a poor environmental record (for example, recent cautions or convictions for pollution offences).
(This approach would be referred to as negative screening)
2 A charity established with the aim of educating the public in the causes and prevention of heart disease decides to adopt an ethical approach to the investment of its funds by choosing to invest in companies that promote healthy living through their products and services. This might include running gyms, production of sports equipment or the production of healthy food products.
(This approach would be referred to as positive screening)
For more information on ethical investment, see Legal Underpinning: Charities and investment matters (part 1, section 4).
Trustees should be clear about exactly what the charity is trying to achieve by investing its funds. This will be different for each charity and will depend on its aims, operating model, timescales and resources. For example, the investment objective may be to maximise income, preserve capital or ensure stability of income.
In simple terms, a charity needs to be clear about what it wants to do, how it intends to do it and what the timescale for delivery will be. These considerations will govern how it decides what its investment objective will be. If a charity is permanently endowed, it will need to consider balancing capital growth and income return in order for the charity to meet its aims and its beneficiaries' current and future needs.
The trustees may find it helpful to review the charity's overall financial position and how they are using the charity's assets to achieve its aims when setting the investment objectives. This will mean considering short and long term financial commitments, as well as the charity's anticipated income.
For example, they may want to consider:
The trustees should then be able to identify funds that:
Risk is part of the investment process and there are a number of risks that trustees should take into account - these are explained in more detail below. Before making any investment decisions, trustees should consider what is the appropriate level of risk that they want to, or are able to, accept. As part of their duty of care, the trustees must be satisfied that the overall level of risk they are taking is right for their charity and its beneficiaries.
Setting investment objectives is not about avoiding risk, but about recognising and managing it. If a risk materialises and results in a loss to the charity, the trustees will be better protected if they have properly discharged their duties and identified and considered the management of the risk. A loss might mean a low return on an investment or the loss of some, or all, of the amount invested, but it can also be about loss of reputation, perhaps through investing in an unpopular or discredited company. As with any loss or setback, the trustees should review the circumstances of the loss, their risk appetite and how they identify and manage risk generally. They should also take the opportunity to learn from their experiences in order to benefit the charity in the future.
Funds invested for the short and medium term should be relatively risk free as charities will want to avoid sudden drops in capital values which could reduce their available funding. A drop in capital value for funds invested for the longer term is less critical because such investments can be held until their value has recovered.
Although it might be difficult for trustees to justify an investment policy that involves the charity taking on a high level of overall risk, it may be appropriate to include certain high risk investments within the overall portfolio.
Some of the main risks associated with investment and ways that they can be managed are outlined below. Charities should consider these when deciding what investments are suitable for their charity.
There are two main risks to capital:
Loss of capital: The main risk for charities arising directly from investments is that they could lose capital and/or income as the value of those investments change. All investments involve some degree of risk because their value can go down as well as up. Generally speaking risk and return go together. The more risky the investment, the higher the possible return, but also the greater the possibility of losing money.
Volatility risk: This is the existence of variability in the price of an asset like a share. Some asset types are more volatile than others, which needs to be taken into account when selecting an investment and considering its place in the overall investment portfolio.
Managing capital risks
Capital risk can be mitigated by having a diversified portfolio of assets - if the investment return from one asset class falls, the losses may be offset by better investment returns in a different asset class. A diverse portfolio can help:
This is about whether a charity will be able to raise the cash to meet its obligations when they fall due or at short notice. Certain types of investment are inherently less liquid than others: for example, land cannot usually be converted into cash as quickly listed shares. Other types may demonstrate different levels of liquidity at different times; this is particularly so where the market conditions are unpredictable.
Managing liquidity risk
Some asset classes are more suitable as short-term investments and others are better for the medium or long term. Charities should consider their time frame for investing and the characteristics of different types of investments.
There are different kinds of market risk and these include:
Managing market risk
Trustees should:
For more information on UK compensation schemes, see Financial Services Compensation Scheme
Some investments such as property are not valued independently on a daily basis. The actual value of these investments will depend on the price that can be realised at the time of sale. There is a risk that the estimated valuation until this time may prove inaccurate. If there is a need to realise capital urgently, it may be that a lower price must be accepted to find a buyer quickly.
Managing valuation risk
This is the risk that a firm with which the charity does investment business (for example, a bank, stockbroker or investment manager) will default on its contractual obligations.
Managing counterparty risk
Managing tax risk
When considering which companies and organisations to invest in, charities are increasingly taking into account such factors as impact on climate, employment practices, sustainability, human rights, community impact, executive compensation and board accountability. These are all example of ESG risk areas which can have long term impacts and can affect the value of a company's shares positively or negatively depending on how the risk areas are managed.
Managing environmental, social and corporate governance risk
Trustees can:
A charity's investment policy should set out in writing what its investment objectives are and how it intends to achieve them.
A charity's investment policy will usually include the following information:
This section sets out some of the basic types of financial investment that are available to charities. Once the trustees have established their charity's investment policy, they (or their investment managers, can decide on the type and range of assets that will achieve their investment objectives.
Trustees can make financial investments in any asset that is specifically intended to maintain and increase its value and/or produce a financial return.
Trustees must also be clear about the difference between investment and trading (see E2 below and Legal Underpinning: Charities and investment matters (Part 1)
Trustees can invest in any type of investment while following the principles set out in this guidance. Possible types of investment include:
In all cases trustees must consider:
Some types of asset, for example derivatives and commodities, are likely to be suitable only as part of a well diversified investment portfolio because of the higher risk they can represent. Trustees should take professional advice where appropriate in selecting and reviewing these types of investment.
If trustees purchase an asset with the intention of selling it for a profit after a short amount of time, it is likely to be considered as trading. Being clear about the difference is important because:
This distinction is particularly important when looking at derivatives, property, commodities and other opportunities which can be regarded either as an investment or as trading, depending on the context in which they are made. Trustees should be able to demonstrate their intention through their decision making.
For more information on:
This form of investment can help charities diversify their investments and thus reduce their investment risk in a more cost effective way than investing directly in individually selected investments. Such schemes can form part, or all, of their investment portfolio, depending on the charity's investment policy.
Collective investment schemes are investment vehicles where the assets of individual investors are pooled together with those of other investors to achieve appropriate levels of diversification. They allow charities to reduce investment risk by spreading their investments more widely than would normally be possible if they were to directly invest in the individual assets held by the scheme. Investing directly in particular assets can usually mean higher costs, both in terms of money and administration, to a charity. This means that this type of investment will be particularly attractive to charities with smaller sums to invest.
An example of a collective investment scheme
A collective investment scheme that many charities use is called a Common Investment Fund (CIF). CIFs are regulated charities in their own right and only charities established in the United Kingdom can invest in them. They give charities of all sizes the ability to invest in a tax efficient way in a range of investments to achieve a professionally managed, diversified and balanced portfolio.
However, diversification through pooled funds does not eliminate all investment risks. Certain funds will be riskier than others, often depending on the extent to which they are diversified amongst different asset classes, different sectors and different countries or regions.
Trustees have to consider the suitability and diversification of the underlying investments in any pooled fund, as well as the suitability of the fund manager. Particular funds will be designed to take into account different investment strategies, for example ethical, short term income or long term growth. This gives charities the opportunity to select one or more to fit with their investment policy.
Each pooled fund will produce documentation which should include such details as:
Before investing, trustees should review these documents and regularly review them after investment, to ensure that each selected pooled fund continues to meet the charity's needs.
For more information, see Common investment funds: A basic guide to their regulation
The previous sections focus on what needs to be considered when making decisions about investments. This section is about who can make the decisions and, where it is not the trustees, what the trustees should do to maintain oversight and control.
The arrangements for making these decisions will be different for each charity depending on:
Whatever arrangements are put in place, the trustees should be able to demonstrate that they have retained overall control of decision making and have complied with their duties.
A charity's trustees have overall responsibility for investment decisions. They might find it helpful to consider the following points:
Trustees must take and consider advice from someone experienced in investment matters before making investments and when reviewing them, unless they have good reasons for not doing so. They may decide not to take advice if they conclude that it is unnecessary, or inappropriate in the circumstances. They may decide not to take external advice if they have sufficient experience within the charity.
The law says that an investment adviser must be someone who is reasonably believed by the trustees to be qualified to give it by his or her ability in and practical experience of financial and other matters relating to the proposed investment.
The most usual options for trustees are:
Independent financial advisers (IFAs) must be authorised by the Financial Services Authority to give advice. They are able to sell the products of many different companies. Tied advisers, such as those working for banks and building societies, are only able to offer the products of their own company.
Trustees need to be careful to ensure that they receive impartial advice. If any trustee has a connection that might benefit directly or indirectly from any financial advice provided to the charity, this should be identified and managed as a conflict of interest.
Trustees who give investment advice are responsible for the quality of the advice which they offer. Like any other adviser, they may be liable to the charity if it makes a loss as a result of their poor or negligent advice. The other trustees must also consider any advice from a fellow trustee objectively and act in the best interests of the charity.
The charity's trustees should decide whether it would be more efficient to manage their investments by:
When deciding the most appropriate approach for their charity, trustees may wish to consider:
They will also need to consider whether they are using the services of an investment manager in:
If a charity decides to use an investment manager, its trustees should:
Most charities that decide to use an investment manager usually go through a formal tendering process and meet with a number of shortlisted firms. This process gives the trustees an opportunity to learn more about the potential investment manager and how they will implement the charity's investment policy
Charities should consider:
Yes. Charities can appoint more than one investment manager, for example to manage a diversified portfolio or an individual asset class, or to give access to a niche market. This is often the case when large portfolios are involved as it can help to spread some of the risk associated with the manager and the portfolio performance.
The trustees have overall responsibility for the investment of a charity's funds.
Where an investment manager manages the charity's investments, there must be:
Written agreement
There must be a formal written contract between the charity and the investment manager. It should be reviewed from time to time by the charity (taking advice where appropriate).
The investment management agreement will be different depending on whether the management of the funds will be discretionary or advisory. It may also be a simple application form. The investment management agreement must require the manager to follow an investment policy in line with the charity's investment policy, which may be included in the agreement.
If giving the investment manager discretionary powers, trustees must not enter into an agreement that:
unless it is reasonably necessary for them to do so.
Investment policy
Trustees who give discretionary powers to an investment manager are legally required to have a written investment policy (Section D3) that covers:
It should be clear from the investment policy that the functions delegated to any investment manager will be carried out in the charity's best interests. If investing in pooled funds, the trustees and the investment manager should ensure that they only invest in funds that are within the remit of the charity's investment policy.
Preparing the policy statement cannot be delegated to the investment manager, but trustees can take independent expert advice on its content. Trustees might find it helpful to prepare it in consultation with the proposed investment manager to ensure its terms are workable and achievable.
Trustees' duty of care
Trustees must follow the duty of care when delegating decision making to an investment manager and preparing their investment policy.
Trustees always remain responsible for:
A trustee is not liable for any act or default of the investment manager unless he or she has failed to comply with their duty of care when:
A charity should:
Trustees should request an outline of all the fees that may apply to a portfolio and ensure there are no unexpected fees (for example, fees the investment manager may pay to a third party for research). The most usual types of fees include:
Trustees should also consider any tax implications. For example, fees charged by investment managers may be liable for VAT.
If the charity appoints an investment manager by a tendering exercise, the trustees may be able to use this to satisfy themselves that the fees represent good value for money and are in the interests of the charity.
Trustees may, alternatively, want to consider taking independent professional advice about whether the charity is getting the best value for money from the arrangements with its investment manager. This could involve a one-off arrangement at the time of a strategic review or an ongoing relationship with a consultant.
Charitable companies have a legal identity and can hold investments in their own name. This simplifies the administration involved in buying and selling investments.
Unincorporated charities do not have a separate legal identity and this means that trustees have to hold investments in their own names on behalf of the charity. This can mean extra administrative costs when buying and selling investments. For this reason, it is often more convenient to appoint a nominee/custodian to hold investments on behalf of the trustee body.
It is up to the trustees to decide whether to appoint a nominee/custodian and whether they will hold some or all of the charity's assets and investments.
For more information, see our guidance on Appointing Nominees and Custodians: Guidance under s.19 of the Trustee Act 2000
Trustees must keep their investment portfolio under regular review. Reviews must cover:
They should also monitor and review their internal arrangements for managing the charity's investments.
The key areas for trustees to consider when monitoring and reviewing the performance of their charity's investment portfolio can be summarised as:
Measuring investment performance
Trustees should decide on a system of target returns (for example benchmarks) against which they can measure the performance of the charity's financial portfolio over a specified time period. The precise nature of the benchmarks and targets will vary for each charity. Trustees may wish to take expert advice from an independent organisation.
If appointing an investment manager, trustees should agree appropriate benchmarks and targets against which performance can be judged over the time period. This will allow an effective and fair assessment of both the investment manager's overall performance, and also their performance against a particular benchmark. The trustees may also wish to consider and compare the performance of their funds against those belonging to other charities with similar investment objectives.
If funds are underperforming, trustees should seek to understand whether it is for an acceptable reason. Similarly, if funds are performing significantly above average, trustees should ensure that it is not because the charity is exposed to greater risks than it is prepared to accept.
Who should conduct the review?
The review of the charity's investment performance can be carried out in conjunction with the investment manager.
On the other hand, the review of the service provided by the investment manager should be carried out independently of the investment manager. If trustees are unable to make a proper assessment without some expert assistance, they can employ someone who is independent of their investment manager to provide that assistance.
Reviewing the service provided by the investment manager
Trustees must consider:
The frequency of reviews
Trustees may decide to hold reviews on a regular basis or they may hold one in response to other events, for example:
Intervening
Trustees should consider whether they need to intervene, for example by giving directions to the investment manager, or revising or terminating their agreement with the investment manager. They should be prepared to intervene if necessary.
Where charities are required to present a trustees' annual report and are subject to a statutory audit, they should include within those reports an outline of any policies their trustees have adopted when choosing financial investments.
The report should also contain a statement about the performance of a charity's investments during the year. Where an ethical investment approach has been adopted, this must also be explained.
Charities that are not subject to a statutory audit must still prepare an annual report but do not have to provide such detailed financial information. For example, it is possible that a small charity will not have an investment policy, especially if it relies solely on grant funding for its operations.
For more information, see our guidance Charity accounting and reporting
Charities can benefit from tax exemptions on their investment income/gains when these are used to further their aims.
However, if certain investments are not deemed by HMRC to be ‘approved charitable investments', it may lead to a restriction on the charity's tax reliefs.
Certain specified investments automatically qualify as 'approved charitable investments'. Those that do not meet the criteria set out in tax law may be treated as 'non-charitable expenditure'.
Further guidance on this can be found on the HMRC website HMRC Charities: detailed guidance notes. Annex III: Approved charitable investments and loans
Charities considering investments which may be treated as non-charitable expenditure should bear in mind that they will need to be able to satisfy HMRC:
If an investment is treated as non-charitable expenditure the charity may lose exemption from tax on income equal to the amount invested. This may mean that the overall investment return is lower than where the returns are relieved from tax, although this may not always be the case. Trustees should consider what is in the best interests of the charity.
If making foreign investments, charities should be aware that there may not be equivalent tax reliefs for UK charities in the countries concerned, and that the investment return may be reduced by foreign taxes. However, charities should take advice if appropriate, about whether there may be alternative foreign tax reliefs.
Charities that have a permanent endowment must keep the capital fund invested. Only the income earned from the investment of the capital fund can be spent on the charity's aims. Charities with permanent endowment should be aware that some assets may be more likely to provide capital growth over a long time period while others might provide better income returns. This means that it is important when they are putting together a portfolio of investments to balance:
In this way, trustees can aim to ensure that their investment portfolio will be able to meet the needs of both current and future beneficiaries.
Yes, but before doing so, it will need to obtain the consent of the Charity Commission.
Charities that do not have permanent endowment can adopt a total return approach without our consent.
Total return describes an 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.
However, unless their governing document specifically allows it, charities with permanent endowment must obtain an order from the Charity Commission before this approach can be used in relation to that investment.
A total return approach can give charities greater flexibility in achieving their investment objectives. This is because the focus is on investments that are expected 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 (see H3 above).
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.
If a permanently endowed charity wants to adopt a total return approach, its trustees should:
For more information on this subject, see Endowed charities: A total return approach to investment
Yes, but the trustees must be able to justify financial support for the subsidiary trading company as a suitable way of investing the charity's resources.
Charities sometimes set up a subsidiary trading company to carry out their aims, rather than to generate income. This is not dealt with in this guidance - for further information see Trustees, Trading and Tax (CC35)
Trustees must use the usual criteria (see C2 above) to assess whether an investment in a subsidiary trading company would be appropriate for the charity. They must:
Trustees should also:
Investing in a company which is not economically viable, and has no real prospect of becoming so, would not satisfy the criteria listed above. This would be the case where the investment is to be used to pay the debts of an insolvent company before it goes into liquidation, solely to prevent it having to be treated as an insolvent company.
Sometimes a subsidiary trading company can be set up to further both the charity's aims and to generate a financial return. It is important that trustees are able to justify the investment either on the basis of the financial return or the extent to which it furthers its aims. Where the company is doing both, it is a mixed motive investment and the criteria set out in section K apply.
Tax treatment
Trustees should be aware that there may be tax implications for investments in, and loans to subsidiary trading companies which are made by a charity where the subsidiary trading company is connected to the charity. Charities are unlikely to encounter difficulties where investment in the subsidiary is undertaken to generate funds that are then used by the charity to deliver its charitable aims. Investments and loans that are made to prop up an ailing connected trading company may not be considered to be made for the benefit of the charity and may impact on the charity's tax exemptions.
HMRC are likely to look critically at a charity's investments in trading companies where the charity appears to be little more than an adjunct tacked onto a business as opposed to the company being there to raise funds for the charity.
It is important to ensure that any investment by a charity in a subsidiary trading company is not treated as non-charitable expenditure. If it is so treated, there may be tax liabilities.
For more information:
Yes, but trustees must be able to justify the investment as appropriate for the charity and that the charity has the necessary power to make it.
Trustees must be careful not to become committed to supporting a company in which trustees, or people connected with them, have a private interest without giving full consideration to whether:
Trustees must use the usual criteria (see C2 above) to assess whether an investment in a company in which trustees, or people connected with them, have a private interest would be appropriate for the charity. They must:
For more information on managing conflicts of interest, see A guide to conflicts of interest for charity trustees.
Trustees should be aware that there may be tax implications for investments made by a charity in a company connected with its trustees, or in which they or their associates have a significant personal interest. HMRC will have to consider whether the investments are made for the benefit of the charity and not for the avoidance of tax. Investing in a company connected with significant donors, including trustees, may also be subject to the Substantial Donors rules and may impact on the charity's tax exemptions. Investments may be subject to the Tainted Charity Donations rules introduced in 2011. While theses rules primarily affect the donor, they can impose a tax charge on charities as well in some circumstances. Making the investments for other purposes may have tax consequences.
For more information, see HMRC Charities webpage
Yes, it's possible that this type of investment could be viewed as a financial investment if the likely financial return justifies it. Charities will need to take advice where appropriate on this.
Investors in outcomes-based finance structures receive a financial return that is fully or partially linked to the social and/or environmental outcomes generated by the services delivered using the investment. A Social Impact Bond is an example and describes a contract which is typically between a public sector body and investors where the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome.
Alternatively, charities might approach this as a Programme Related Investment - see section J - or as a Mixed Motive Investment (section K).
Yes, providing the trustees consider it is in line with their investment duties. For example, they must consider:
Tax legislation offers incentives to donors who give investments, including land, to charity. It is up to trustees to decide whether to sell or keep the investment. In doing so, they must ask:
There are also other questions that trustees may want to ask such as:
If the charity has accepted the gift of an investment with the condition attached that the donor must consent to any change in that investment, donors should not withhold their consent because it suits their own personal interests to do so, but should act in the interests of the charity.
Tax considerations
Trustees should be aware that there have been some cases where the reliefs for giving investments have been subject to misuse as part of tax avoidance schemes. In these schemes, the investments given typically conveyed little benefit to the charity or the charity received a very small return for allowing itself to be used as a conduit through which valuable investments were passed. Charities should avoid becoming involved in such arrangements. In certain circumstances, the Tainted Charity Donations rules might impose a tax charge where the donation in question is made under Gift Aid.
Complicity in tax avoidance could amount to a breach of trust or a non-charitable activity. If trustees of a charity are concerned that an investment or investments have been given to them as part of tax avoidance arrangements they should consider informing HMRC.
For more information, see HMRC Charities website
Yes. A charity as a stakeholder can engage with an organisation that it has an interest in or whose activities might affect its work on a number of levels. It can ask it for information or express views, or it can exercise any voting rights in order to influence an organisation's policies in a way that better reflects its own values and ethos.
Stakeholder activism can also be used for the purpose of engaging with the corporate governance of the companies in which the charity invests. This is in order to safeguard its investment and to ensure that the companies it invests in are being managed for the long term benefit of shareholders. It can also be used for the purposes of Programme Related Investment (section J) or Mixed Motive Investment (section K).
Charities may ask their investment manager to vote on their behalf.
A charity as a stakeholder in a particular business may wish to exercise its voting rights in order to influence a company's policies in a way that reflect its own particular values and ethos.
Where a charity chooses to engage directly in shareholder activism, there are some important points for it to consider:
In some circumstances, a charity may wish to acquire investments that are related to its values and ethos primarily to engage in stakeholder activism.
Where a charity has delegated voting responsibilities to its (discretionary) investment manager, the charity should ensure that it is aware of the philosophy and processes behind its investment manager's voting policy. The charity is likely to want regular reports on how its shares have been voted.
Investment managers should vote and engage with the company management as a matter of course. However, they will generally be voting with long term financial outcomes in mind, in other words seeking the best long term financial return for the charity. They should provide the charity with their corporate governance statement and regular reporting of their engagement activity. Some investment managers have stakeholder activism policies that can be followed on behalf of many clients, achieving a greater effect with economy of effort.
Savings and cash deposits are forms of investment and the legal requirements set out in section C2 apply. Cash deposited in a bank or building society normally earns interest which can be used by the charity to generate income until it is either needed to spend on the charity's aims or placed in longer term investments.
There are a number of other ways of investing cash, particularly for larger charities, and charities should take advice where appropriate. They should identify and plan for the management of any risks attached to the investment of cash.
Cash needed for the day to day running of the charity is usually held in an instant access current or deposit account. Charities wishing to lock away cash for longer periods of time, for example to fund a project at a defined point in the future, can deposit cash in a fixed term or notice account, which can offer higher rates of interest, but will usually have restrictions on access to funds.
In complying with their duties (set out in section C2), trustees should:
This should cover where and how long cash may be deposited and the maximum amount to be placed in one institution. If necessary, the statement should cover the policy for short, medium and long term deposits.
Cash should only be deposited with reputable institutions, such as those authorised by the FSA in the UK or by the relevant financial regulator in any other country.
Cash deposits should be in an interest bearing account, unless trustees plan to use the money on deposit in the short term or invest it elsewhere for the longer term. Trustees should consider: the rates of interest on offer. Interest rates vary across institutions and on particular accounts over time. Charities should regularly review accounts to ensure they are getting competitive rates. Rather than constantly seeking the highest rate, trustees may prefer to deposit cash in an institution that has consistently good interest rates the timing of interest payments, for example, whether they are monthly or annual the conditions of access to funds, including any charges or penalties arising from access at short notice or early termination whether interest is paid gross or net of tax the charity's ethical stance. Non financial considerations, such as the location of the institution, are important but only secondary to those listed above.
Cash deposits should be in an interest bearing account, unless trustees plan to use the money on deposit in the short term or invest it elsewhere for the longer term. Trustees should consider:
Non financial considerations, such as the location of the institution, are important but only secondary to those listed above.
Charities should seek assurance that institutions are protected wherever possible and trustees should be fully comfortable with the protection arrangements before depositing money with that institution, whether in the UK or abroad. For further information, see our guidance on what the Financial Services Compensation Scheme means for charities the FSCS website
Charities should seek assurance that institutions are protected wherever possible and trustees should be fully comfortable with the protection arrangements before depositing money with that institution, whether in the UK or abroad. For further information, see
Trustees should balance the benefit of getting a higher rate of interest for depositing a single large sum against the risks involved with depositing with a single institution. Charities depositing large amounts should consider establishing a policy for the maximum amount to be placed with any one institution in order to reduce the risk of lost deposits. By splitting large deposits between banking institutions, trustees reduce the risk of large losses due to institutional failure.
Charities must take advice from someone experienced in investment matters where they consider they need it.
The opening or closing of bank accounts should be authorised by the whole trustee body, but can be delegated where appropriate subject to reasonable limits. We recommend that all subsequent deposits of funds should be authorised by at least two authorised individuals. For most charities, these individuals should be trustees. Subject to restrictions imposed by the charity's governing document, trustees are recommended to appoint more than two signatories, so that two can always be available if necessary. All trustees share responsibility for ensuring that proper and appropriate steps are taken to protect the investment before arranging for deposit of the charity's money.
There are many deposit accounts available, and some designed specifically for charities, which pay interest gross of tax. If, however, the account preferred by trustees pays interest on the charity's deposit net of tax, then trustees should ensure they are able to reclaim the tax.
Common Deposit Funds (CDFs) are deposit taking schemes that are tax efficient, administratively simple and cost efficient. They do not fall within the Financial Services Compensation Scheme. They enjoy the same tax status as other charities. CDFs accept deposits from depositing charities and place the money they have accepted on deposit in the money market. By pooling funds (usually for relatively short duration) on deposit, CDFs can secure a higher rate of interest for the depositing charities than each charity would otherwise get, if undertaken separately.
For more information, see Common deposit funds - A basic guide to their regulation
Trustees should regularly review their cash management arrangements and the costs and benefits of their charity's cash accounts to ensure their deposits are protected and that charges and rates of interest are competitive.
PRI allows a charity to directly further its aims and, at the same time, potentially achieve a financial return. In making a PRI, trustees are not bound by the legal framework for financial investment (see C2 above), because their decision is about applying assets directly in furtherance of the charity's aims.
PRI uses charitable resources to finance charitable and other organisations in a way that:
Example
A charity that works to relieve poverty may give a loan to another charity that helps unemployed people back into work.
This will:
Successful PRI can enable charities to:
The difference between financial investments, PRI and grants
A PRI is different from a financial investment or a grant although it may look similar in form.
The difference between a financial investment and a PRI lies in the primary intention of the investment. The main reason for making a PRI is to further the charity's aims, not to generate a financial return. The main reason for making a financial investment is to generate a return which can then be used to further the aims of the charity. Usually the charity will be seeking the best financial return on their investments within the level of risk they consider appropriate for the charity. The intention is important because it allows trustees to show how they are acting in the interests of the charity.
PRI also differs from grant making because a grant is made to further the charity's aims with no expectation of a financial return. However, some charities might choose to make a grant alongside a PRI, for example to help build an organisation's management capacity thus helping to ensure loan repayment.
Financial investment targeting the best rate of financial return given the level of risk considered appropriate
PRI furthering a charity's aims, with the expectation of some financial return
Grants directly furthering a charity's aims
PRIs can take a wide range of forms and can be made to both charities and other types of organisation. They can range from:
PRIs often take the form of loans, equity investments or pooled funds more commonly associated with financial investment. PRIs may also be made through intermediaries.
Common examples include:
Loans
The key characteristic of a loan is that the borrower should repay the amount of the loan with or without interest.
If making a loan, a charity should ensure that the terms of the loan set out:
A charity can also guarantee loans on behalf of organisations or individuals that will further the charity's aims. With loan guarantees, trustees are promising a third party that they are responsible for the obligations of the recipient should it not be able to meet those obligations. The trustees should ensure that they have, or can access, sufficient resources to meet any call under the guarantee. In the meantime they retain use of their organisation's funds.
Equity investments
Exceptionally, PRI can take the form of an equity investment where a charity buys shares in a company and provides it with start up capital. Ownership usually gives a right to a dividend if paid and a right to vote at the Annual General Meeting. However trustees should be aware that there are particular risks involved. They will need to consider what processes can be put in place to ensure the funding will continue to be used to further the aims of the charity. For example this could take the form of shareholder agreements, buy back positions and convertible loan stock.
For more information on equity investments in non charitable companies, see J9.
Charities can also engage in the following:
Revenue participation or quasi-equity
This means that the charity as an investor gets a financial return based on the share of revenue/profits made by an organisation in return for providing capital for the development of a particular initiative. The initiative must be in furtherance of the charity's aims in order for this to be a PRI. The return the investor receives is linked to the financial success of the venture. Investments of this kind do not involve the issue of shares and do not generally confer ownership on the investor.
Outcomes-based finance
Investors in outcomes-based finance structures receive a financial return that is fully or partially linked to the social and/or environmental outcomes generated by the services delivered using the investment. A Social Impact Bond is an example, and describes a contract which is typically between a public sector body and investors where the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome. The social and/or environmental outcomes must be in furtherance of the charity's aims in order for this to be a PRI.
It's possible that this type of investment could be viewed as a financial investment if the likely financial return justifies it. It could also be made as a mixed motive investment. Charities will need to take advice where appropriate on this.
When making a PRI, trustees must act in the best interests of their charity and ensure that:
Before making a PRI, they should:
Trustees are unlikely to be criticised for their decisions if they have considered the relevant issues, taken advice where appropriate and reached a reasonable decision. The PRI checklist at annex 2 is intended to guide trustees through the decision making process.
The trustees have overall responsibility for PRI decisions. They should put in place the appropriate governance arrangements for managing their PRIs. The governance structure and level of delegation will be different for each charity depending on its internal resources and expertise and they should consider the following points:
Trustees should consider the following risks and make decisions for their management appropriate to the size and activities of their charity and proportionate to the scale of the PRI in relation to the activities of the charity:
There is no legal obligation to take advice. Much will depend on whether the trustees feel comfortable and competent enough to make decisions on PRIs.
The issues that might influence the need for advice are:
and whether the charity has in house expertise in:
No, a charity can only make a PRI that supports its charitable aims. However, trustees can explore new and innovative ways of using PRIs to further their aims bearing in mind the principles set out in this guidance.
It is important that trustees understand the full scope of their charity's aims and can demonstrate how the intended outcomes of the PRI will further these.
Some large charities, often trusts and foundations or charitable intermediaries providing financial support to other charities, have been set up with general charitable aims and will therefore be able to make a wide range of PRIs from their income and expendable endowment that support any charitable purpose they select.
Charities should consider at the outset how they would manage situations where the PRI funded activities cease to further its aims. The terms of the PRI agreement should reflect what is possible and practical to end the PRI and, if feasible, the return of funding which can no longer be used to further the charity's aims.
Where the PRI takes the form of a loan directly from the charity to the organisation it is funding, the agreement may include a condition requiring repayment of the loan or the conversion of the loan to commercial terms in the event that the investment is no longer being used to further the charity's aims.
The position is more complicated where the PRI takes the form of equity investments because of the requirements of company law concerning the reduction of the capital of companies. However, it is possible to put other arrangements in place. For example, a company might agree conditionally to purchase its own shares, or to issue shares which are redeemable in such circumstances.
Intermediaries
Where the PRI is made through an intermediary, the furtherance of the charity's aims may be complicated by the intermediary's relationship with the ultimate recipient. While the principle that the PRI needs to wholly further the charity's aims remains, the trustees should take into account that practical considerations may limit the intermediary's ability to agree how to end an arrangement with its charitable investors.
Risk management
The charity will need to consider, when the investment is first proposed, the risk that the charity might find itself locked into a PRI which has lost any connection with its aims. Trustees may decide that, where the risk is small, the benefit to be obtained by making the investment justifies taking that risk. However, where the amount invested represents a significant part of the charity's resources, the risk becomes greater and will be more difficult for the trustees to justify taking.
Some private benefit flowing to other investors is acceptable if the trustees are satisfied that the private benefit is:
Trustees must have regard to our guidance on private benefit in Charities and Public Benefit when making PRIs.
A charity's aims must be for the public benefit. However, sometimes, the best way for a charity to help its beneficiaries may result in individuals or businesses making a private benefit. Where there is an unacceptable level of private benefit it can affect charitable status.
Trustees will need to use their judgment to determine whether the private benefit is acceptable. They must always act in the best interests of the charity. They can include the charity's enhanced ability to further its aims (as a repaid loan can be lent to others) in their assessment of the project's public benefit. In some cases the assessment required will be relatively simple, in others it will be complex, based on multiple factors, and the decision will be finely balanced. Trustees should make decisions based on what is reasonably known at the time of making the PRI and ensure they have a record of their decisions.
Where trustees consider that individuals or businesses are making a private return in PRI which is beyond what they consider as necessary, reasonable and in the interests of the charity, they should ensure that the private benefit is recoverable by the charity by some other means. For instance, the person receiving the private benefit may choose to pay it to the charity. If there is continuing unacceptable private benefit, the charity should consider its options for exiting the PRI.
In general, investing in the equity of a private company will mean a financial return for the shareholders or will further some other non charitable purposes of the company. This will usually mean that the charity's investment is not supporting wholly charitable aims and, therefore, a charity can only make a PRI in such a company in exceptional circumstances. These circumstances are only likely to arise where there is a clear correlation between the social purposes that the company will achieve and the aims of the charity.
Therefore, the trustees must satisfy themselves that:
Where there is potential for considerable economic gain by the company, the trustees should take all reasonable steps to ensure that the charity benefits from this gain. Otherwise, they could not demonstrate that any private benefit is necessary, reasonable and in the interests of the charity. There should be adequate safeguards in place to ensure that any unacceptable private benefit does not arise. For further information see Legal Underpinning: Charities and investment matters (section 5).
Equity investment in a commercial organisation
A charity set up to help people with disabilities find employment might be interested in buying newly issued shares in a commercial organisation run by and employing disabled people. The success of the company will deliver benefits to shareholders. The more successful the company, the more disabled people it is able to employ and train.
Points to consider
A loan to a commercial organisation for a specific aim.
A commercial organisation providing vocational training requests a loan to enable it to provide training facilities for the unemployed in a disadvantaged area. These new facilities will enable the company to train fifty local unemployed people each year under a local authority contract.
A local charity set up to relieve unemployment considers making the loan on the basis that it furthers its charitable aims. The contract offered by the local authority enables the commercial organisation to cover costs and make a small profit margin. However, this margin is not sufficient to support a loan at market rates.
The commercial organisation needs this loan to develop and equip training premises. It could not operate in the disadvantaged area without the charity's loan which is offered at below market rates. The loan provided by the charity may make an indirect contribution to the company's profitability because it may, for example, win more contracts of this kind with larger margins.
Yes. If investing in and through intermediaries, trustees need to be assured that:
Some charities and non-charitable organisations specialise in PRI and act as intermediaries. They finance, or facilitate the financing of, other charities and non-charitable businesses. This approach can:
Examples
1. Buying shares in a loan fund
A charity which aims to protect the environment by supporting the development of renewable energy sources might invest in a loan fund set up to finance new green technologies. Given that the fund can continually make loans, the investment by the charity will have a considerable impact on the number of new green technologies supported.
2. Investing in a Social Impact Bond
A Social Impact Bond typically describes a contract between a public sector body and investors where the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome.
A charity that works to help the unemployed back to work might invest in a social impact bond that funds a project or multiple projects that aim to improve an individual's chances of finding work. This could be a direct investment in the project or be managed through an intermediary. Upon completion of the project, if the targets set out are met, then the charity will recoup its investment and receive a return. (Some charities may choose to make this type of investment as a financial investment).
In general, permanent endowment involves funds held on trust to be invested to provide a financial income which can be spent on furthering the charity's aims. This will not usually permit permanently endowed funds to be used for PRI.
A charity might be able to use its permanent endowment for a PRI by:
Using the income
A charity can use part or all of the income from the permanent endowment to make a PRI.
Justifying it as a financial investment
A PRI is one where the financial return is not the primary reason for making the investment. Trustees can use permanent endowment held on trust for financial investment if the risk profile and financial return sought enable it to be justified as an investment.
Trustees can take account of ethical investment considerations or make mission connected investment when investing permanent endowment.
There may be some occasions when an investment generating less than a market return might be justified because of the extent to which the investment furthers the charity's aims. In this case, the justification has to show that the extent to which the charity's aims are furthered is roughly equivalent to the reduction of income. This is one type of mixed motive investment (see section K).
Adopting a total return approach
Trustees managing permanent endowment can consider adopting a total return approach. This means that part of the capital growth on the endowment can be allocated to their income fund and spent on the charity's aims. This can be spent on the PRI. However, a permanently endowed charity wanting to adopt a total return approach to investment will need to approach the Charity Commission for its prior consent.
Removing restrictions on permanent endowment
Trustees may be able to remove the restrictions from some or all of any permanent endowment their charity holds. They can do this if they decide that it will allow them to carry out the charity's aims more effectively.
The trustees will need to pass a formal resolution that the restrictions on the permanent endowment should be removed from all or part of the fund concerned. If the market value of the permanent endowment is over £10,000, they may also need our approval. This would enable trustees to use the capital in any PRI scheme that furthered the aims of the charity concerned.
Further information on permanent endowment is set out in Permanent Endowment: What is it and when can it be spent?
Where the trustees must prepare an annual report and are subject to statutory audit, the report must include an explanation of the charity's policy for making a PRI and how any material PRI has performed against the objectives set for it.
In the annual accounts, the balance sheet must show investments held primarily to provide a financial return for the charity (financial investments) and PRI separately. PRI should generally be included at the amount invested less any impairment and, in the case of loans, any amounts repaid. Impairments should be charged as an expense of charitable activities in the Statement of Financial Activities. Where a gain is made on the disposal of a PRI then it should either be set off against any previous impairment loss or included as a gain on disposal of fixed assets for the charity's own use and recorded under 'other operating resources' in the SOFA.
For more information, see Accounting and Reporting by Charities, SORP 2005
If a PRI no longer furthers a charity's aims or the trustees' motive for holding the investment changes so that it is held primarily for a financial return, then it will be necessary re-classify the investment as a financial investment in the charity's balance sheet.
One of the key characteristics of a PRI is the expectation of repayment and/or a financial return for the charity, although the primary aim of a PRI is to further the aims of the charity. Therefore a PRI is an asset but one which, like any other asset, can reduce in value. If the PRI is no longer worth what it is valued at in the balance sheet, it should be included at its recoverable amount. Alternatively, provided the aims of the charity are still furthered by the investment, the charity may choose to convert the PRI into a grant.
Trustees will need to review their charity's PRIs regularly. The approach to, and frequency of, this review will depend on the nature and size of the charity's PRIs and on its need for resources which may change over time. Trustees will need to consider:
There may be tax implications for PRI which depend on the structuring of the investment and the tax treatment of any return - charities should be aware of this and take advice where appropriate. As long as charities apply the income and gains arising from a PRI charitably they will normally be exempt from UK tax.
Charities risk losing their tax exemptions if they incur non-charitable expenditure. This can include making investments or loans that are not 'approved charitable' investments or loans. Some categories of loans and investments are automatically treated as 'approved charitable' loans and investments. HMRC will consider claims for other loans and investments to be treated as 'approved charitable' as long as they are made for the benefit of the charity and not for the avoidance of tax. HMRC will normally accept claims for PRIs to be treated as 'approved charitable investments'.
For more information see the HMRC Charities website
The previous sections have concentrated on two different forms of investment - financial and programme related. However, some new and developing investment opportunities do not fall entirely within just one or the other of these categories, but can still be justified as being in the interests of the charity. We refer to these as mixed motive investments.
We recognise that this new approach to investment could be an appropriate way for some charities to respond to the changing environment in which they work. We intend this basic legal and good practice framework to help charities consider whether mixed motive investments might be an option for them and to describe the decisions involved.
A mixed motive investment is one which trustees make on the basis that it has elements of both financial investment and programme related investment. The investment cannot be wholly justified as either one or the other.
Generally, trustees must be able to show that investments they make are in the best interests of the charity. They do this by justifying them as either:
Separate legal requirements apply to both.
However, sometimes trustees will want to invest in a way that they consider to be in the best interests of their charity but not entirely justified on just one of these grounds alone. In this situation, they may be able to justify the investment as a mixed motive investment if they are satisfied that:
As mixed motive investments are a developing area, professional advice may be required on specific proposals.
Where an investment cannot be wholly justified either as a financial or a PRI, but the trustees still consider that it is likely to be in the best interests of the charity, it may be possible to justify it as a mixed motive investment. However, trustees should bear in mind that:
Sometimes a subsidiary trading company can be set up both to further a charity's aims and to generate a financial return. It is important that trustees are able to justify an investment either on the basis of the financial return or the extent to which it furthers its aims. Where the subsidiary trading company is doing both, it is a mixed motive investment and the criteria set out in this section will also apply.
For permanently endowed charities, there may be some occasions when an investment generating less than a market return might be justified because of the extent to which the investment furthers the charity's aims. In this case, the justification has to show that the extent to which the charity's aims are furthered is roughly equivalent to the reduction of income.
They should carefully think through the justification for a mixed motive investment before it is made and be satisfied that it is in the best interests of the charity. It should also keep a record of the decision and the reason for it.
A charity should ask the following questions when considering making a mixed motive investment:
A mixed motive investment is not justified where:
A mixed motive investment should be monitored both as a financial investment and as furthering the charity's aims and different criteria apply to each. In addition, the charity needs to bear in mind that the balance between the two elements may change.
Trustees should monitor and review:
If an investment falls in value or becomes irrecoverable then there will be a financial loss. However, provided that the trustees have taken and recorded their decisions properly, then they are likely to be able to address questions or challenges about their actions.
The Charities SORP does not currently directly address accounting for recent developments in mixed motive investments which can take many different forms.
Where mixed motive investments are material, the trustees should consider their separate disclosure within the balance sheet or within the investment notes to the accounts. The trustees should explain their investment policy in relation to such assets within their annual report and assess their performance.
In so far as the investment seeks a financial return, trustees should consider whether fair value or transaction cost approaches are appropriate to their year end accounting for such assets. As this is an emerging area, we anticipate further consideration will be given to accounting issues as practice develops.
For more information about accounting for investments, see Accounting and Reporting by Charities, SORP 2005
The Charity Commission produces a wide range of publications and website guidance giving information and advice to charity trustees and the general public on a number of issues relating to charity law, regulation and good practice. The full list is on our website www.charitycommission.gov.uk.
We also list here a selection of other organisations and publications which can be used as sources of information.
The list of our publications and on-line guidance below is a selection based on some of the issues identified in this guidance.
Charity Finance Group (CFG)
This is a membership organisation which helps charities manage their accounting, taxation, audit and other finance related functions.
Charity Finance Group CAN Mezzanine 49-51 East Road London N1 6AH
Tel: 0845 345 3192 Website: www.cfg.org.uk
Companies House
The main functions of Companies House are to:
Companies House Crown Way Maindy Cardiff CF14 3UZ
Tel: 0303 1234 500 Website: www.companieshouse.gov.uk
CAF Charities Aid Foundation
The Charities Aid Foundation is a registered charity that works to create greater value for charities and social enterprise. It does this by transforming the way donations are made and the way charitable funds are managed.
CAF (Charities Aid Foundation) 25 Kings Hill Avenue Kings Hill West Malling Kent ME19 4TA
Tel: 03000 123 000 Website: www.cafonline.org/.uk
Her Majesty's Revenue and Customs (HMRC)
HMRC's website contains information on a range of issues of interest to charities including Gift Aid, Payroll Giving, tax reliefs and VAT.
HM Revenue and Customs Charities St Johns House Merton Road Liverpool L75 1BB
Charities helpline: 0845 302 0203 Website: www.hmrc.gov.uk/index.htm
The Pensions Regulator
The regulator works to improve confidence in work-based pensions by protecting members' benefits and encouraging high standards and good practice in running pension schemes.
The Pensions Regulator Napier House Trafalgar Place Brighton BN1 4DW
Tel: 0845 600 0707 Website: www.thepensionsregulator.gov.uk/
The National Council for Voluntary Organisations (NCVO)
The NCVO is a national charity that provides support and a wide range of information for voluntary and community organisations. Its website offers advice on various issues connected with risk management in the third sector.
NCVO Regent's Wharf 8 All Saints Street London N1 9RL
Tel: 020 7713 6161 Website: www.ncvo-vol.org.uk/
UKSIF UK Social Investment Forum
UKSIF promotes responsible investment and other forms of finance that support sustainable economic development, enhance quality of life and safeguard the environment. They also seek to ensure that individual and institutional investors can reflect their values in their investments.
UKSIF Holywell Centre 1 Phipp Street London EC2A 4PS
Tel: 020 7749 9950 Website: www.uksif.org/
The following terms are used throughout this guidance and should be interpreted as having the specific meanings given below.
Aims and charitable aims mean the aims which the charity is set up to achieve. The aims are usually expressed in a charity's governing document.
Asset class is the term used to describe a type or category of investments that share similar characteristics, such as equities, cash deposits or bonds.
Asset allocation is the term used to describe the process of spreading investments among different asset classes, in accordance with the needs of the charity.
Charitable company means a charity which is a company formed and registered under the Companies Acts.
The Charities Act means the Charities Act 2011.
Charitable return means a return that directly furthers the purposes of the charity.
A collective investment scheme is an arrangement that enables a number of investors to 'pool' their assets and have them professionally managed by an independent manager. The wider range of investments in a collective investment scheme can help reduce the risk of any negative effect that one investment can have on the overall performance of the portfolio. Unit trusts and common investment funds are examples of collective investment schemes.
A custodian is someone who, on behalf of the charity, looks after any documents or other evidence of legal title to investments - for example share certificates and title deeds to land. A custodian may also provide other investment related services, such as handling claims for repayments of tax due in respect of investment income. The term ‘custodian' is sometimes used to refer to a person who is both a nominee and a custodian. Custodians have no power to make management decisions and must act on the lawful instructions of the trustees.
A custodian trustee is a corporation appointed to have the custody of trust property - it acts as both nominee and custodian. A custodian trustee has no role in the charity's management and must act on the instructions of the charity trustees, unless they are asked to do something that is not allowed by the governing document or by charity law.
Endowment funds are the property of a charity (including land, buildings, cash or investments) which the trustees are legally required to invest or to keep and use for the charity's aims. Endowment may be expendable or permanent.
Ethical investment describes a way of making financial investments which takes into account the charity's values and ethos. Trustees must exercise their investment power in the best interests of the charity.
FSMA means the Financial Services and Markets Act 2000.
FSCS means the Financial Services Compensation Scheme.
The general power of investment means the power of investment which is given to trustees by section 3 of the Trustee Act 2000, taken together with the power to invest in land which is given to trustees by section 8 of that Act. These provisions do not apply to charitable companies.
Gift Aid is a tax relief for single outright cash gifts made to charity by individuals (including those carrying on a trade) and companies in the UK.
Governing document means any legal document setting out the charity's aims and usually, how it is to be administered. It may be a trust deed, constitution, memorandum and articles of association, will, conveyance, Royal Charter, Charity Commission or Court Scheme, or any other document which describes the trusts of the charity.
Holding trustees are individuals who are appointed by the trustees to hold the legal title to a charity's property. The way they are appointed and any other details relating to their duties and responsibilities will usually be set out in the charity's governing document - they are not appointed using the powers in the Trustee Act. Holding trustees are often used by unincorporated charities and can be members of the trustee body. They have no management functions and must act on the lawful instruction of the charity trustees.
Intermediaries finance, or facilitate the financing of other charities and non-charitable businesses.
Investment: In this guidance we use the term investment in its widest sense. By investment we mean using assets in the best possible way in the interests of the charity in a way which may attract a return.
Investment manager means an individual or a corporate body appointed by a charity's trustees to advise and make investment decisions on their behalf. The investment manager will make those decisions in line with the investment policy which the trustees have developed.
Liquidity refers to the ability of an asset to be converted into cash quickly and with minimum loss of value.
Mission connected investment describes a way of making financial investments that also help the charity to achieve its aims directly. Trustees must exercise their investment power in the best interests of the charity.
A mixed motive investment is one which trustees can justify making on the basis that it combines a financial return as well as a contribution to furthering their charity's aims.
A nominee is one or more individuals or a corporate body appointed by trustees to hold the legal title to the property of a charity on behalf of the charity or its trustees. The nominee's name will be entered on the share register of any company whose shares are owned by the charity. In the case of land, the nominee's name is entered in the proprietorship register. Nominees have no power to make management decisions and must act on the lawful instructions of the trustees.
Pooling schemes are arrangements to facilitate investment management by a charity trustee, or body of charity trustees, with a number of different charities to administer. They are a type of common investment fund.
Programme related investment (PRI),sometimes referred to as social investment, is an investment made by a charity wholly to further its aims with the potential of receiving a financial return. Different rules apply for PRI and financial investments.
Public benefit is the legal requirement that every organisation set up for one or more charitable aims must be able to demonstrate that its aims are for the public benefit if it is to be recognised and registered as a charity in England and Wales.
Private benefit(s): In this guidance private benefit means any benefits that a person or organisation receives other than as a beneficiary of a charity. It does not, therefore, include the sorts of personal benefits people might receive as a beneficiary, such as receiving an education, or medical treatment, or a charitable grant for example.
Reserves are the resources that a charity has, or can make available, to spend for any or all of the charity's aims once it has met its commitments and made provision for its other planned expenditure.
Restricted funds are funds subject to specific trusts that fall within the wider purposes of the charity. Restricted funds may be restricted income funds, which are spent at the discretion of the trustees in furtherance of some particular aspect of the purposes of the charity, or they may be endowment funds where the assets are required to be invested or retained for actual use (for example, a building) rather than spent.
Risk is used in this guidance to describe the uncertainty surrounding the performance of investments. It also refers to the risk that a firm with which the charity does investment business may default on its contractual obligations. Risk may either enhance or inhibit any area of a charity's operations.
Social enterprise is a broad term used to mean a business operating for a social purpose, which reinvests its profits for that social purpose rather than redistributing them. Some social enterprises are also registered charities, but not all.
Social investment is a term widely used when investing to achieve a social purpose and also a financial return. There is no precise definition of social investment and it is used in different ways. There are a number of ways that a charity can invest for a social, charitable and financial return set out in this guidance.
SOFA means Statement of Financial Accounting.
Taxes Act refers collectively to the tax legislation concerned with Income Tax, Corporation Tax & Capital Gains Tax.
Trustees means charity trustees. Charity trustees are the individuals or corporate bodies who, under the charity's governing document, are responsible for the general control and management of the administration of the charity. In the charity's governing document they may be called trustees, managing trustees, committee members, governors, council members or directors, or they may be referred to by some other title.
The Trustee Act means the Trustee Act 2000.
Unincorporated charity means a charity that is not:
Unrestricted funds (including designated funds) are income or funds which can be spent at the discretion of the trustees in furtherance of any of the charity's aims. If part of an unrestricted income fund is earmarked for a particular project it may be designated as a separate fund, but the designation has an administrative purpose only, and does not legally restrict the trustees' discretion to spend the fund.
When considering whether to invest in a PRI, trustees should be satisfied that it is in the best interests of the charity and that the level of risk they are taking is appropriate.
This checklist sets out the sort of questions that trustees should ask themselves when thinking about making a PRI:
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