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I enclose the sealed Order and # copies - one for each of the trustees - granting the trustees the power to decide which part of the unapplied total return belonging to the charity should be allocated to the trust for application (ie the income) for the purposes of the charity. You will have seen a draft of the Order and confirmed that you have considered its provisions and the Commission guidance set out in Operational Guidance 83. |
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As with the use of any of the powers a charity may have, the trustees must act prudently and reasonably and must use the power in the interests of the charity. |
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Once trustees have started to use the power given by clause 1 of the Order, they cannot use any other method of allocating the investment return of the charity without the prior approval of the Commissioners. |
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Directions relating to the use of the power: |
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The power granted by the Order is subject to a number of directions. The directions take the form of duties the trustees must comply with when they make use of the power. The directions are binding and trustees must familiarise themselves with all of them. The directions include: |
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- A specific duty of care set out at clause 2(1) of the Order. This requires the trustees to exercise such skill and care as is reasonable in all the circumstances when using the power, and when discharging the duties set out in clauses 2(2) to 2(4) of the Order.
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- The duty only to use the power in a way that will enable the trustees to meet the needs of the present and future beneficiaries of the charity, in accordance with its objects.
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- The duty to obtain and consider "proper advice" (a trustee is relieved from the obligation to take advice if they reasonably conclude that in all the circumstances it is unnecessary or inappropriate to do so).
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"Proper advice" is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his or her ability in and practical experience of investment and actuarial matters connected with the proper use of the power conferred by clause 1 of the Order. |
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This letter is not intended to be an exhaustive review of the duties attached to the use of the power which are set out in the Order. |
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Using the power: |
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Trustees will need to establish a rational policy to determine periodically what part of the unapplied total return is, from time to time, to be allocated to the trust for application (income) and, at the same time, give consideration to the amount of unapplied total return that will remain unapplied after the allocation to the trust for application (income). Trustees will need to consider these two areas simultaneously, as they are two parts of a single process. |
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Trustees may allocate part of the unapplied total return to the trust for application (income) at any time. However, on each occasion the allocation must be compatible with the discharge of the duty to be even-handed in their treatment of present and future beneficiaries. Each time trustees come to use the power they must consider the unapplied total return available to them – rather than the charity’s investment return received in the year the allocation is to be made. In deciding the part of unapplied total return which is to be allocated to the trust for application (income) trustees must take account of such factors as: |
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- fluctuations in the value of investment assets from year to year and the effect of any anticipated inflationary increase in the cost of providing the charity’s services and grants;
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- changes in the charity’s service provision – trustees will need to consider past patterns of expenditure on the objects of the charity and the anticipated demand for the charity's support.
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How much these and other factors will affect a charity will depend on the type of activity in which it is engaged. As far as the thresholds in the Charities Act 1993 and the Charities (Accounts and Reports) Regulations of 1995 and 2000 are concerned the amount allocated to the trust for application (income) in any financial year should be treated as the charity’s income. |
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Trustees must be able to justify the balance of funds remaining as unapplied total return after any allocation to the trust for application (income). The justification should be based on the need to ensure that the charity will be able to carry out its purposes effectively in the future. |
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We hope that the availability of this power will enable trustees to more effectively balance the needs of present and future beneficiaries. If the trustees are concerned about the use of this power and would like general guidance, please let us know. |
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Finally, trustees should be aware that the model Order will cease to have effect if a statutory default power comes into force covering the allocation of investment returns. |
