PERMANENT ENDOWMENT OG44 B1

In this section...

OPERATIONAL GUIDANCE

PERMANENT ENDOWMENT

WHEN IT CAN BE SPENT AND WHEN OUR APPROVAL IS NEEDED

OG 44 B1- 18 March 2008

Purpose

This OG explains the action we should take when we receive copies of resolutions passed by trustees under sections 75, 75A and 75B of the 1993 Act, as amended by the 2006 Act.

Functional responsibility

For action

CC Direct, Advice and Orders, Large Charities Division, Legal Division

For information

All operational divisions

Contents

1. Introduction
2. Terms used in this guidance
3. Which charities can use the statutory power?
4. Case handling
5. Authorised staff
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. Introduction
	This guidance explains what caseworkers should consider when dealing with copies of resolutions passed by trustees under the provisions of sections 75, 75A or 75B. Those provisions enable trustees to remove the bar on spending their charity’s permanent endowment (referred to in both this and the public guidance as the ‘statutory power’). Generally the power will be applicable to investment permanent endowment and will only apply to functional permanent endowment where there is a power, express or implied, to dispose of the functional permanent endowment and not to replace it but to hold the proceeds as investment permanent endowment.
	What property constitutes permanent endowment and the distinction between investment permanent endowment and functional permanent endowment (which term includes specie land) is explained in section B2 of our public guidance which is reproduced in OG 44 A1. Any enquiries about what permanent endowment is and when it can be spent should be referred to Permanent Endowment – What is it and when can it be spent? (CSD 1347A) which is available on the Apply for it area of our website.

2. Terms used in this guidance
	In this OG:
	Where we talk about a charity whose permanent endowment is "entirely given" we are using this as a shorthand for the condition at s.75A(1)(a). In full, this condition refers to charities whose permanent endowment ‘consists entirely of property given by a particular individual person (including a bequest made in a will), or by a particular institution (by way of a grant, gift or other means), or by two or more individuals or institutions for the same purpose’. In practice this condition covers virtually all charities with permanent endowment – the only charities not within its scope are those which have created their own permanent endowment in reliance on a power in their governing document which allows the trustees to do this.
	Institution means a trust or other type of undertaking. This is a very wide term and can include private trusts, charities and other organisations including limited companies, local authorities, professional partnerships such as legal firms, trade unions and industrial and provident societies.
	Market value means the market value of a charity’s permanent endowment as recorded in the accounts for its last full financial year, or if no such value was recorded, the current market value of the fund as decided by a valuation carried out for the purpose.
	A special trust, as defined in section 97(1) of the 1993 Act,means funds or property held and administered on its own separate trusts by or on behalf of a main charity for any special purposes of that charity. It follows that the objects of a special trust must be narrower than those of the main charity. See OG 34 B1 Reporting and Linked Charities - Registration Reporting and Accounting - Distinct Charities.

3. Which charities can use the statutory power?
	Charity trustees have a statutory power to remove the permanent endowment restrictions from their capital, but the power operates in different ways depending on the circumstances of the charity concerned. There are three sets of relevant circumstances:
	(1)	Larger charities which meet certain conditions set out in s.75A of the 1993 Act i.e. a charity to whom all the following apply:
		the gross annual income is more than £1,000; and
		the market value of the whole of its permanent endowment (including assets that have been given to the charity for particular purposes and land) is more than £10,000; and
		the permanent endowment is entirely given.
	Together these charities are referred to as type 1 charities.
	(2)	Charities that are within the scope of s.75 – ie they do not fall within type 1 and are not special trusts (but see below). In effect, this means that if a charity has either:
		yearly income of £1,000 or less; or
		market value of capital of £10,000 or less ; or
		its permanent endowment is not entirely given,
	then that charity will not fall within type 1 and, assuming it is not a special trust, it will be treated as a type 2 "smaller" charity (although this is not necessarily an appropriate description for all charities that could make use of s.75).
	(3)	Endowment funds of special trusts that, as a result of a direction under section 96(5), are treated as separate charities for the purposes of the procedure set out in section 75B. Those where the market value of the fund exceeds £10,000 and the permanent endowment is entirely given are treated in the same way as type 1. Those where these factors do not all apply are treated in the same way as type 2.
	The differences between type 1 and type 2 charities are summarised in the following chart:

Type 1 charities

Type 2 charities

‘Ordinary’ type 1 charities must have an annual gross income of more than £1,000;

and

the market value of their permanent endowment must be more than £10,000;

and

the permanent endowment must be entirely given.

‘Ordinary’ type 2 charities must satisfy either of the following conditions:

(i) they have an annual gross income of not more than £1,000 or the market value of their permanent endowment is not more than £10,000;

the permanent endowment is not entirely given.

If the charity is a special trust:

(i) the market value of the permanent endowment must be more than £10,000;

and

(ii) the permanent endowment must be entirely given

The charity’s income is not relevant.

If the charity is a special trust, it must satisfy either of the following conditions:

(i) the market value of the permanent endowment is not more than £10,000. The charity’s income is not relevant;

the permanent endowment is not entirely given

4. Case handling
	4.1 Initial consideration 4.2 Have the trustees used the relevant procedure correctly 4.3 Type 1 charities 4.4 Type 2 charities

	4.1 Initial consideration
	The consideration of most resolutions using the statutory power will be straightforward and we should proceed on the basis that each one is valid unless there is evidence that this is not the case. Caseworkers dealing with these cases should first ask themselves the following question:
	Are the assets in question permanent endowment? (See section 1 of OG 44 A1).
	If they are, the resolution can be considered using the following guidance.

	4.2 Have the trustees used the relevant procedure correctly?
	When satisfied that the property is permanent endowment, caseworkers should then consider whether the trustees have used the relevant procedure correctly (from our point of view the procedure for type 2 charities (smaller and some others) is much more straightforward than that for type 1 charities (larger but not all larger charities). The procedures the trustees must follow are explained in detail in part C of OG 44 A1.
	The procedure for type 1 charities is different to that for type 2 charities and consequently the action we must take differs as well.

	4.3 Type 1 charities
	4.3(i) What must trustees send us when they have passed a resolution? 4.3(ii) What we do when we first receive a resolution 4.3(iii) Making our decision 4.3(iv) Asking for further information and public notices 4.3(v) Publishing notices 4.3(vi) When we have given concurrence and the charity is registered 4.3(i) What must trustees send us when they have passed a resolution?

	4.3(i) What must trustees send us when they have passed a resolution?
	To get concurrence the trustees must first send us a copy of the resolution together with a statement of their reasons for passing it. They can do this either by completing our declaration form CSD 1347B or by including this information in a letter or e-mail. Our public guidance CSD 1347A encourages them to use the form as it makes it easier for them to ensure they provide the information we need and, from our point of view, we can also indicate our concurrence on it.
	However, we should be flexible about how the required information is provided and, if the charity concerned is registered, it will usually be sufficient for the trustees to send us a letter or e-mail, the text of which includes the wording of the resolution, the statement of their reasons for passing it and confirmation that the requirements of the power to spend permanent endowment (if we have not received a copy of the most recent accounts we should ask for them) have been met.
	If the charity is not registered we should also ensure that we receive a copy of its governing document, any other documents that help to identify whether the property is permanent endowment and its most recent accounts.
	4.3(ii) What we do when we first receive a resolution
	When we receive the copy of the resolution and statement of reasons we have three months, from the date they are received, to consider them and concur with or reject the resolution, unless we require the trustees to publish a notice, in which case the three month period starts on the day the notice is first published.
	Before the end of the three month period we must write to, or e-mail, the trustees either saying that we approve the resolution or we do not. Failure to do this will bring the resolution into force by default.
	The caseworker should first check that all the legal requirements for passing the resolution have been met namely:
	the charity actually has property that is permanent endowment to which the statutory power applies (see section 1 and section B2 of our public guidance which is reproduced in OG 44 A1);
	the charity is a type 1 charity (see section 3);
	the charity trustees have made a reasonable decision that they are satisfied that the purposes set out in the trusts to which the fund is subject could be carried out more effectively if the capital of the fund, or the relevant portion of the capital, could be expended as well as income accruing to it, rather than just such income;
	the resolution has been passed at a properly convened meeting of the trustees.
	At this stage, if we need more information before we can make our decision about the resolution we can require the trustees to-
	give public notice of the resolution in a way that we decide (see sections 4.3(v) and 4.3(vi)); and/or
	provide us with more information or an explanation about the circumstances in which they have decided to act and how they have met any of the requirements connected with the resolution (see section 4.3(v)).
	We should consider using the powers to request additional information or publish notices in any case where the resolution and available evidence does not resolve the doubt about whether or not we should concur with a resolution.
	4.3(iii) Making our decision
	When considering resolutions made using the statutory power we must also take into account-
	(a)	any information available to us about the wishes or intentions of the people or institutions who donated the property (for example, are the terms of the gift so rigid that they are now significantly reducing the charity’s effectiveness and have the current trustees provided sufficient evidence for us to be able to agree to change those terms), and
	(b)	any changes to the circumstances in which the charity operates since the property was first given (including, in particular, its financial position (for example, has the value of the income fallen to a point where its objects cannot be properly achieved), the needs of the beneficiaries and changes in the social, economic and legal environment in which it carries out its objects).
	We cannot concur with the resolution unless we are satisfied that-
	(a)	it is consistent with the original spirit or intention of the gift(s) taking into account the changed circumstances in which the charity is working; and
	(b)	the trustees have met all the legal requirements in connection with the resolution.
	We should expect that in most cases:
	the trustees with their knowledge of the charity will be in the best position to decide that the resolution meets these criteria; and
	we can concur with the resolution without the need to publish notices or ask for more information, particularly if the trustees have used our declaration form (CSD 1347B), which will normally give us all the information we need to make a decision.
	However there will be cases where we will not agree with the trustees’ decision. This is more likely to occur in cases where the charity has been established comparatively recently than an older charity, value of whose endowment may have declined in real terms to the point where the income from the permanent endowment alone is no longer sufficient to enable it to properly achieve its objects. Also with permanent endowment created comparatively recently it is:
	more likely that the donor or donors, or people who knew them and were aware of their wishes when they gave the property, will still be alive and be able to object to the resolution;
	less likely that the circumstances in which the charity is operating will have changed in a way that justify departing from the wishes of the donor.
	Put simply, it is unlikely that we will have grounds to object to a resolution using the statutory power if the origin of permanent endowment is over 100 years ago but we should be more cautious if the origin of the permanent endowment is less than 50 years, its value is still substantial and the circumstances in which the charity is operating have not changed very much.
	However it is still possible that they may apply to a charity of fairly recent origin, for example, the trustees of a charity to benefit veterans of World War II may decide that it is expedient to be able to spend its permanent endowment now to prevent the trusts from failing and having to find a cy-près purpose when there are no longer any surviving beneficiaries. This would probably be both acceptable to the donors and reflect the changed circumstances in which the charity is operating.
	Alternatively, it is doubtful that a large endowment to provide bursaries at a school will be suitable for a resolution using the statutory power. This is because the removal on the bar on spending permanent endowment would not reflect the intention of the donors and affect the interests of future beneficiaries. In this situation the onus will be on the trustees to clearly demonstrate that the circumstances in which the charity is operating have changed in a way that will lead to a more effective use of the assets if the permanent endowment can be spent. It is quite likely that we will require the trustees to give public and provide further information before making a decision in such a case.
	If there is doubt about whether we should concur with the resolution, we should first consider the trustees' statement of reasons for passing the resolution. The statement should make it clear that the trustees are satisfied that the purposes of the charity (or the special trust) can be carried out more effectively if some or all of the permanent endowment can be spent as well as income derived from it, rather than just such income.
	If we concur with the resolution, the property referred to in the resolution can be spent by the trustees as soon as they receive our approval. If the trustees have used it, concurrence can be given by endorsing our standard declaration form CSD 1347B. Alternatively concurrence can also be given using the standard paragraphs in CSD 1347C.
	Circumstances when we should not concur with a resolution include-
	if we are not satisfied that the trustees have used the procedure correctly; or
	we are not satisfied that circumstances of the charity justify departing from the founder’s intentions; or
	if we are not satisfied that the proposal accords with the spirit of the gift (even though it will inevitably not be consistent with the permanent endowment restrictions, the proposal must accord with the spirit of the gift in the changed circumstances in which the decision of the trustees is being taken); or
	if the property concerned is not permanent endowment to which the statutory power applies, for example, if it is the proceeds of sale of land (and buildings) or other assets held on functional trusts to be used for the purposes of the charity with no power to dispose of that land or assets (see section A of OG 44 A1).
	Notice of non concurrence can be given using the standard paragraphs in CSD 1347D.
	Our decision on all statutory power resolutions can be challenged by a referral to the Charity Tribunal.
	4.3(iv) Asking for further information and public notices
	When we require notices to be published and/or further information we can use the standard paragraphs in CSD 1347E.
	Circumstances where we might require trustees to provide further information include:
	where we have not received all the documents we need to properly consider the resolution, such as documents that confirm that the property is permanent endowment or the most recent accounts;
	where we are not sure the procedural requirements have been followed. for example, there is reason doubt that the meeting at which the resolution was passed was properly constituted;
	where we are not satisfied that the proposal accords with the spirit of the gift, for example, there is evidence that the donor may not have wanted the endowment to be spent, there would generally need to be changed circumstances which mean that the wishes of the donor would be different to that indicated by the evidence;
	if it is not clear to us that the charity’s property is permanent endowment which is capable of being expended;
	Circumstances when we might require notices to be published include:
	where the charity has been founded comparatively recently and it is not clear that the charity’s circumstances have changed in a way that justifies concurring with the trustees’ resolution and comments for people with an interest in the charity will help us make a decision;
	where a large amount of permanent endowment will be made expendable and there is no evidence that the trustees have consulted people with an interest in the charity, such as the beneficiaries or known descendants of the founder who might be aware of the founder’s wishes;
	where there is a history of mismanagement or misappropriation of the charity’s assets or we have conducted a formal investigation;
	the proposal has caused members of the public to write unsolicited letters to us complaining about or the charity has attracted a high level of public interest, (possibly even from Members of Parliament) expressing concern at the way it is run;
	where the charity’s assets are used in ways known to carry a higher level of risk of fraud.
	Any responses to notices and additional information from people with an interest in the charity should be included in our consideration about whether to concur with a resolution.
	4.3(v) Publishing notices
	When we require notices to be published, 28 days are allowed from the date of first publication for people with an interest in the charity to contact us with their comments on the resolution. Examples of people who might have an interest in a charity include:
	Existing or potential beneficiaries;
	Creditors, debtors or donors (including bodies that have made grants to the charity);
	Local authorities;
	If the charity is connected to one with a membership, and we do not know if they have been consulted about the resolution, the members.
	When considering any comments, if there is any doubt about whether a person does have a genuine interest the advice of Legal Division should be sought.
	In most cases it will be sufficient to publish a single notice, using form CSD 1347F, in a way chosen by the trustees using their local knowledge of the charity and, if it has one, the area of benefit, who should be able to confirm to us that the method of publication chosen is appropriate in the circumstances, ie the trustees should provide details of where the notice was publicised and give reasons why this was the best way to bring it to the attention of ‘interested persons’.
	4.3(vi) When we have given concurrence and the charity is registered
	Concurrence with a statutory power resolution must be recorded on a charity’s entry on our Register.
	If the charity had a gross income in its last full financial year of not more than £5,000, it is registered voluntarily and the trustees can ask for it to be removed from our Register (they can do this at any time, including when they send the copy of the resolution to us). If the trustees have not raised the issue, we should, when giving our concurrence, indicate that removal will probably be the easiest action to take and save them from the burden of having to keep the charity’s entry on our Register up to date. See OG 17 B4 Voluntary removal of excepted charities.
	Registered charities with an annual gross income of more than £5,000 must remain on our Register until either:
	their annual gross income falls below that level; or
	all the property has been spent and the charity has ceased to exist.
	In cases where the charity is to remain on the Register its entry should be amended to indicate that the trustees have passed a resolution under section 75A of the Charities Act 1993 (or section 75B if the charity is a special trust), as amended by the Charities Act 2006, and the date on which we gave concurrence.

	4.4 Type 2 charities
	4.4(i) When can the trustees start to spend the charity’s permanent endowment? 4.4(ii) What must the trustees do if the charity is registered with us?
	4.4(i) When can the trustees start to spend the charity’s permanent endowment?
	The trustees can spend their investment permanent endowment as soon as they have passed the resolution. If the charity is not registered, they can proceed without reference to us.
	4.4(ii) What must the trustees do if the charity is registered with us?
	If the charity is registered with us and its income after spending their permanent endowment is not more than £5,000 a year, the trustees:
	may, if it is still operating, ask us to remove it from the Register. See OG 17 B4 Voluntary Removal of Excepted Charities.
	must, if it has ceased to operate, tell us that this has happened, following the passing of a section 75 resolution, and send us a copy of the final accounts showing a nil balance. On receipt of this information the charity can be removed from the Register.

5. Authorised staff
	Staff in Charity Services who have been authorised to do so may give concurrence to resolutions using the statutory power if it is required.

Glossary of Terms used in this Guidance
	1993 Act
	2006 Act
	de minimis
	governing document
	gross income
	land
	specie land
	trustees

Index to further related information