Casework Guidance

B1 Procedures for dealing with resolutions to spend permanent endowment

B1.1 Section 281, 282, 288 and 289 provisions

Section E2 sets out in detail the circumstances when permanent endowment can be spent by which charities. This chart acts as a reminder of the conditions in which a charity can pass a resolution to spend its permanent endowment.

In this guidance the term 'smaller charity' is used purely for procedures relating to sections 281 to 291 of the Act and should not be confused with the term 'small charity' used in the 200 series of Operational Guidance to mean an unincorporated charity that has a gross annual income of less than £20,000.

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B1.2 Case handling

For smaller charities who want to spend all permanent endowment under sections 281 or 288 we may receive (where the charity is registered) either confirmation that the charity has ceased to operate or a request for voluntary removal where annual income is £5000 or less. Where a smaller charity is spending only part of its permanent endowment or is not registered we may hear nothing. 

Charity trustees will use the online application form to inform us that they have resolved to spend permanent endowment under section 282 or 289 of the Act. The declaration sets out the charity's details, asks for authority to spend the permanent endowment and sets out a statement of reasons why the charity needs to take this action, it also asks the trustees to certify that the provisions of sections 282 or 289 have been met (this includes special trusts where the income is more than £10,000).

The trustees confirm that:

• the assets in question are permanent endowment;
• the charity's circumstances enable them to use the provisions;
• the resolution was properly passed; 
• their actions in making the proposal to spend permanent endowment is reasonable.

In considering the information supplied we recognise that the trustees are certifying that they are conforming with the requirements of the Act and in straightforward cases we will not question this further. Most cases will be straightforward. However, doubts may arise about the reasoning given by trustees on how spending permanent endowment would make the charity more effective and this will cause us to take a more in-depth look at the application. Sections B1.3 to B1.5 below set out factors that may lead us to ask for more information or request the trustees give notice of their intentions before we make our decision.

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B1.3 Section 281 smaller charities (applies to all smaller charities and to those larger charities that have permanent endowment which is not entirely given) - what we must do

These charities (including some special trusts) acting under section 281 of the Act can spend their permanent endowment as soon as they have passed a resolution. If the charity is not registered with us they can proceed without reference to us.

If the charity is registered with us and its gross annual income after spending its permanent endowment is £5,000 or less, the trustees:

• may, if the charity is still operating, ask us to remove it from the Register (see OG 531-1 Removal of Charities from the Register); or
• must, if the charity has ceased to operate, confirm this fact so that the charity can be removed from the Register.

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B1.4 Section 282 larger charities (except for those with permanent endowment not entirely given) - what we must do

The resolution and statement of reasons for the trustees' action will usually come via our online application form. In rare cases where we get resolutions and accompanying information sent to us in other formats these should be considered in the same way as online applications.

When we receive the resolution and the statement of reasons we have 3 months from the date of receipt to consider them and concur or reject the resolution, unless we require the trustees to publish a notice, in which case the 3 month period starts from the date that the notice is first published.

Before the end of the 3 month period we must confirm in writing, using the application form and letter or email, that we either concur or reject the resolution. Failure on our part to respond within 3 months means that the charity can proceed as if we had concurred.

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B1.5 Section 282 larger charities (except for those with permanent endowment not entirely given) - considering the resolution

The online form confirms that the trustees:

• are properly appointed in line with the charity's governing document; 
• have identified properly the property to which section 282 applies (the trustees will need to take their own legal advice about the nature of the property and if it is permanent endowment); 
• have passed the resolution at a properly convened trustee meeting; and that
• the charity is one which correctly falls for consideration under section 282 - see chart above.

We will not consider these points further unless we have particular reasons to think they are not correct.

We will consider whether:

• the decision made by trustees is reasonable considering:
  • the purposes of the trusts for which the permanent endowment was given;
  • that what is proposed remains within the spirit of the original gift; and
  • that those purposes could be carried out more effectively by expending the permanent endowment rather than simply relying on its income.

In looking at the charity's purposes and the spirit of the original gift we take account of the wishes of the donor for use of the endowment and any changes in the charity's circumstances, for example:

• its finances;
• the needs of its beneficiaries, both now and in the future;
• the changed social, economic and legal environment in which the charity operates.

This may lead us to refuse to concur with a resolution from a relatively new charity on the basis that circumstances may not have changed very much since the charity's inception and the donor's wishes may still be carried out using the income from the endowment. Whereas the endowment of a charity formed 100 years ago may have declined in real terms to such an extent that its income does not allow the charity to achieve its objects.

In most cases the trustees will have supplied sufficient information for us to concur with the proposals. However, where we have doubts about the trustees' decision making process we will need to look in further detail. We will take account of our Risk Framework before making our decision whether to concur or reject the resolution.

We may need to direct that the trustees:

• give public notice of the resolution in a way that we decide - see section B1.6 below.
• provide us with more information or an explanation about the circumstances in which they have decided to act and the way the requirements to make the resolution have been met.

Making the decision about the trustees' action will take account of the following elements:

• The charity's history - evidence of previous concerns, whether they were serious or minor, reliability of meeting our accounting and reporting requirements;
• The type of charity - this includes size (in terms of income and assets), numbers of beneficiaries and their needs, how beneficiary needs are met;
• Previous non-compliance - whether we have had any particular cause for concern on the way the charity has been run that has caused us to open a regulatory compliance case, which may have an impact on the resolution;
• Sector impact - whether there is anyone who would be adversely affected by what is proposed and should reasonably be allowed to make representations or whether the public profile of the charity is such that there could be a wider local or national interest;
• Complexity and urgency - the proposals may be complex thereby creating greater risks to charity property. You may require legal or accountancy advice immediately bearing in mind that strict deadlines are imposed (see B1.3).  

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B1.6 Section 282 larger charities (except for those with permanent endowment not entirely given) - requests for information and requirement to give notice

At any point before the expiry of the time limits we can direct the trustees to provide more information, which may clarify procedures taken or allay any concerns we have about the trustee actions in making the decision. We might also ask for further documentary proof of permanent endowment or for other documents that would allow us to make our decision. However, we need to remember that this action needs to be carried out within the 3 months we have to concur or reject the resolution and notify the trustees of our decision.

We also have the option to direct the trustees to publish notice of their intention to spend permanent endowment. Circumstances where this might apply include:

• where the charity has been founded comparatively recently and it is not clear to us that the charity's circumstances have changed in a way that justifies the action proposed;
• where large amounts of permanent endowment will be made expendable and the trustees have not provided us with evidence that they have consulted those who may have an interest; 
• where there is a history of mismanagement or misappropriation of charity assets;
• we are aware that the proposal has created a lot of public interest.

While it is for the trustees to decide on the wording of the notice, the model text in G1 sets out the information that the trustees must include in the notice and also includes details of the declaration the trustees must make to us once public notice has been given. We should include the model text in any correspondence with trustees where we decide that public notice is necessary.

We should agree the method of notice with the trustees in advance (in most cases, it will be sufficient to publish a single notice, in a way chosen by the trustees using their local knowledge of the area of benefit), and we should specify this in the direction. Usually we will simply agree with the trustees' proposals as long as they confirm that the method of publication is appropriate in the circumstances - providing details of where notice will be published and why this is the best way to bring their intentions to those who may be interested.

Those who may be interested include:

• beneficiaries;
• original donors or their descendants;
• other charities or sector representatives;
• local authorities;
• those owed money by the charity;
• donors;
• employees.

Where we direct notices to be published we allow 28 days from the date of first publication for representations to be made to us. The date of first publication of those notices then becomes the 'relevant date' from which we have 3 months to consider the resolution. The relevant date will be set out in the public notice declaration the trustees must submit once public notice has been given.  

At the end of the public notice period we will consider the representations made. We then have to make our decision and notify the trustees within 3 months of first publication of the notices.  

Legal advice should be taken where we have any doubts about whether a response is from someone with a legitimate interest.

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B1.7 Section 282 larger charities - what we need to do when we have given concurrence

When we concur with a resolution under section 282 we must record this fact on the Register of Charities. 

Charities with a gross annual income of more than £5,000 are required to be registered with us (unless exemptions or other exceptions apply) and charities having a gross annual income of £5,000 or less may register voluntarily. 

Where a charity is registered voluntarily and will remain as an active charity following the resolution the trustees can:

• ask for the charity's entry to be removed from the Register.

If no indication has been given by the trustees we can, when giving our concurrence:

• suggest that they have the charity removed from the Register to save them from the burden of keeping the charity's entry on the Register up to date. See OG531-1 Removal of Charities from the Register.

Where the charity will not continue, the trustees must confirm that it has ceased to operate so that we can remove it from the Register.

Registered charities with a gross annual income of more than £5,000 must remain registered until either:

• their gross annual income falls to £5,000 or less; or
• all the property has been spent and the charity has ceased to exist.

In all cases where the charity is to remain on the Register, the Register entry should be amended to indicate that the trustees have passed a resolution under section 282 of the Charities Act (or section 289 if the charity is a special trust subject to a s12(1)(b) direction) and include the date on which we gave concurrence.

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B1.8 Dealing with a proposal to make a s12(1)(b) direction to enable a special trust to take section 288 or 289 action

B1.9 Authorised Officer powers

Authority for a resolution to spend permanent endowment under these provisions will be given in line with OG702 Authorised Officer Powers.

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Case Studies

D1 Examples of what may be found in trust documents to indicate the nature of the assets held

D1.1 Land and buildings are held to be used for a specific charitable purpose, for example, to provide homes for the elderly, with no power for them to be sold.

This is likely to be functional permanent endowment because the property has to be used for the purpose of the charity. The fact that it cannot be sold might indicate that the founder's intention was that the property should be retained forever.

D1.2 Money donated is to be invested and the income received from the investment is to be used for the charity's purpose.

This is investment permanent endowment. This is common for charities that need to provide a regular income, such as school prize funds or educational bursaries. It is also common for many old local charities to be endowed in this way to provide an income that can be used for a range of purposes, such as relief of those in need or the maintenance of a parish church.

D1.3 Property is to be held 'forever' or 'in perpetuity'.

The property is likely to be permanent endowment. It may be land or investments or some other kind of property such as works of art or documents of historic importance. Depending on its nature the property may be either investment or functional permanent endowment.

D1.4 Land and buildings are to be used for specific purposes and can only be sold in certain specified circumstances.

This is functional permanent endowment. Sometimes the power to sell can only be used where the charitable need no longer exists. There will usually be a direction about how the proceeds of sale can be used, at which point the property may cease to be permanent endowment.

D1.5 Money donated is to be invested but can be spent on the charity's purposes if the trustees so decide.

This is not permanent endowment and is expendable endowment or capital.

D1.6 A house bought as an investment to be let, producing an income for the charity.

If the money used to buy the property is investment permanent endowment, the house represents investment permanent endowment and, if sold, the proceeds of sale continue to be permanent endowment. If the money used to buy the property is not investment permanent endowment, the house will not be permanent endowment and the proceeds of sale can usually be spent on the charity's purposes.

If the house was bought with a combination of permanent endowment and expendable money, the trustees need to keep a record of the proportions of each that were used to provide the purchase money. If the property is sold the trustees must divide the proceeds, after all the expenses of the sale have been met, in these proportions.

In each case, all income from letting the property can be spent.

D1.7 A charity's governing document directs that the charity's assets can be used to provide land and buildings to be used for the charity's purposes.

The land and buildings will probably be functional permanent endowment unless the governing document directs otherwise. 

D1.8 A charity's governing document allows the trustees to set aside surplus income to be invested as permanent endowment to increase the annual income of the charity.

This is investment permanent endowment. However, this will be a situation where the investment permanent endowment is not entirely given - see section E2.1. [NB this is a power to accumulate and so will be subject to section 14 of the Perpetuities and Accumulations Act 2009.]

Legal/ Policy and Accountancy Framework

E1 What is permanent endowment?

E1.1 How we identify permanent endowment

In general terms permanent endowment covers any land, investment or other asset belonging to the charity, which the trustees cannot spend because of a restriction in the charity's governing document. Section 353(3) of the Charities Act says that a charity has permanent endowment unless all its property can be spent on its charitable purpose without having to distinguish between capital and income. 

In most cases the permanent endowment restriction exists permanently, as its title suggests. However, in some cases permanent endowment can exist until a particular situation arises which changes the basis on which the property is held. A common example is where land and buildings are held for a specific purpose with a proviso that if it is no longer needed for that purpose it can be sold and the proceeds applied for other charitable purposes; whilst that property can fulfil its purpose then it remains permanent endowment. 

Interpreting the governing document provisions can sometimes be problematic. If there is nothing to indicate that there is a restriction on spending capital we will usually agree that it can be spent on the charity's purposes. It is not necessary for there to be a clear power to spend capital in order to support the view that the charity's assets are all expendable and consequently not subject to a permanent endowment restriction. However, if a power to spend income is given but the governing document does not mention capital, that is an indication of the charity having permanent endowment.

The governing document may not always be available or provide a definitive answer on all the charity's assets. Therefore, it will be necessary to look to other available evidence, such as conveyances, other deeds, wills or historical evidence of how the asset has been used. However, care needs to be taken not to rely on single facts, for instance where historical evidence shows that it is income only from a fund that has been spent but there is no evidence to support why this should have been so. We have had cases where trustees' presumption of permanent endowment has been found to be misplaced.  

Examples of permanent endowment can be found under the Case Studies tab.

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E1.2 Specific forms of permanent endowment

There are two main forms which permanent endowment takes:

• 'Investment' permanent endowment: This is capital which is to be used to provide an income for the charity and which cannot be spent as income. The document that directs how the property should be held and used will usually specify that the capital should be invested and the income from the investments spent on specific charitable purposes.
• 'Functional' permanent endowment: This is capital to be used for a specific purpose or purposes of the charity. Other guidance we provide also refers to land held on functional trusts as designated (previously 'specie') land. Common examples of functional permanent endowment include village halls, recreation grounds, housing, museums and historic buildings. With this type of permanent endowment the distinction between capital and income often does not apply as there may be no income.

There is an important legal distinction between investment and functional permanent endowment which affects how any authority to spend it can be obtained; as follows:

• For investment permanent endowment, the restriction on expending capital is an administrative restriction [see Re Laing Trust [1983] 3 Weekly Law Reports p.886.]
• In the case of functional permanent endowment, the sale of the endowment and the use of the proceeds for a purpose other than the replacement of the endowment in question may involve a change of purpose.

The distinction between an administrative restriction and a change of purpose is the key to any decision we make about how permanent endowment can be used. If we are satisfied that it is in the best interests of the charity, we can remove an administrative restriction by making an Order under section 105 of the Charities Act. However, where there is a change of purpose, and there is no power that allows the property to be used for the new purpose, the change can only be made by Scheme. The Scheme is usually made by us or, on rare occasions, by the Court. See Changing your Charity's Governing Document CC36 and OG 500 and OG 501 guidance about Schemes and Orders.

It is unlikely that trustees will be able to use the statutory power to spend permanent endowment to release permanent endowment held on functional trusts. This is because:

• It is difficult to see how the trustees could be satisfied that the purposes for which functional permanent endowment is held (ie for the use of specific property for the purposes of the charity) could be carried out more effectively by the sale of that property for any purpose other than replacement; and
• Trustees have to be able to use the capital of the fund as well as the income, rather than the income on its own. Accordingly, we consider that the power does not apply to assets, which (due to the trusts on which they are held) could not be sold and the proceeds invested to generate an income. 

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E2 The statutory power to spend permanent endowment, which charities can use it and when

The statutory power to spend permanent endowment can be found at sections 281 to 291of the Charities Act. Section 281 deals with those unincorporated charities that fall below the threshold for the larger charities set out in section 282. Sections 288 and 289 deal with special trusts subject to a direction under s12(1)(b). There are different procedures for charities that fall under sections 281 and 282. Special trusts can use either the section 281/282 powers or the 288/289 powers. The legal provisions for spending permanent endowment are set out below; procedures for dealing with resolutions to spend permanent endowment are set out in Casework Guidance. 

E2.1 Definitions

We use specific terms in this guidance for the way we apply the provisions of the Act.

'Entirely given' is used for the condition at section 282(1) and 289(1). This refers to charities whose permanent endowment "consists entirely of property given by

• a particular individual (including a bequest made in a will); or 
• a particular institution (by way of grant or otherwise); or
• two or more individuals or institutions for the same purpose"

In practice this condition covers most charities with permanent endowment. Charities with permanent endowment which is not entirely given include those that have created their own permanent endowment using a power in their governing document (see example D1.8).  

Where permanent endowment that has been entirely given is transferred from one charity to another, this does not change the fact that this was entirely given so sections 282 & 289 will still apply to this property.

'Institution' means a trust or other type of undertaking. This is a very wide term and can include:

• private trusts;
• charities;
• other organisations including limited companies, local authorities: and
• 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.

'Special trust' is defined for these purposes by section 287(1) & (2) of the Charities Act and 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. Examples of special trusts that may have permanent endowment might be funds:

• donated to a school to provide prizes or bursaries;
• belonging to a charity that advances a religion which funds the maintenance of a place of worship;
• donated to a charity for relief of poverty to provide an income for particular beneficiaries, such as the elderly.

See OG555 which explains about linked charities and special trusts. 

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E2.2 Circumstances in which charities can use the statutory powers

Charity trustees can use the statutory power to remove permanent endowment restrictions but the power operates in different ways depending on the circumstances of the charity concerned.

Section 282 of the Charities Act sets out the provisions for larger charities (except for those with permanent endowment which is not entirely given). In this context a larger charity is one where all of the following conditions apply:

• the gross annual income for the charity is more than £1,000; and
• the market value of the whole of its permanent endowment  is more than £10,000 (this includes land and any assets that have been given to the charity for particular purposes); and 
• the permanent endowment is entirely given.

The procedures for dealing with resolutions made for such charities are set out at section B1.5 of Casework Guidance.

Section 281 of the Charities Act sets out the provisions for charities that are not regarded as section 282 charities. In the case of these charities one of the following may apply:

• the gross annual income is £1000 or less; or
• the market value of the whole of its permanent endowment is £10,000 or less; or
• the permanent endowment (however large) is not entirely given.

Sections 288 and 289 of the Charities Act set out the provisions for special trusts that are treated as distinct charities as a result of a direction under section 12(1)(b) of the Act. In effect these trusts will be treated in the same way as charities that come within sections 281 and 282 according to the size of their permanent endowment or whether or not the endowment is entirely given. The income of the special trust is not a factor in relation to this section.

E2.3 How the trustees begin the process of spending permanent endowment

In all cases the trustees must pass a resolution to spend permanent endowment. The trustees must:

• be satisfied that the purposes of the charity could be carried out more effectively if they use some or all of the charity's permanent endowment as well as its income, rather than income on its own; and
• formally pass a resolution that the permanent endowment restrictions should be removed from all or part of the fund concerned.

To pass such a resolution they must call a meeting or otherwise act according to the charity's governing document for the proposals to be voted on. The trustees must satisfy the quorum provisions of the charity's governing document and the provisions for voting (usually carried by the majority vote of trustees present). A postal vote of the trustees may be used if the governing document allows it.

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E2.4 Functional permanent endowment

Our view is that it will be unlikely that trustees will be able to use the powers to spend functional permanent endowment in its entirety. As property is held on trusts for the purpose of the charity it is unlikely that the trustees could meet the legal requirement for passing a resolution as set out in E2.3 above. The sale of the property would defeat the charity's objects and require a change of purpose.  The most likely use for these provisions on functional permanent endowment is liable to be where the trustees wish to sell a small part of the charity's property which does not affect the running of the charity or involve a change of purpose. The trustees would use the Trusts of Land and Appointment of Trustees Act 1996 provisions to make the sale. The proceeds of such a sale are likely to be held on an implied trust for investment with the income being applicable for the maintenance of the remaining permanent endowment. If the trustees believe it is in the interests of the charity to spend the funds held on the implied trust for investment, they are likely to require a cy-près Scheme. If they wish to spend the funds of the remaining permanent endowment, they can use section 281 or 282.

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E3 What we must take into account in making our decision

We should consider using the powers to request additional information or to publish notices in any case where the resolution and available evidence does not resolve any doubt we have about whether or not we should concur with a resolution.

E3.1 Making our decision

When considering resolutions made using sections 282 or 289 of the Act we must take into account:

• any information available to us about the wishes or intentions of the people or institutions who donated the property; and
• any changes in the circumstances of the charity since the property was first given.

We cannot concur with a resolution unless we are satisfied that:

• it is consistent with the original spirit of the gift(s) taking into account the changed circumstances in which the charity now operates; and
• the trustees have met all the legal requirements in connection with the resolution - see E2.3 above.

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 where the trustees use the web based application form which will normally give us all the information we need to make the 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 more recently where, unlike older charities, the value or the endowment may not have had the chance to decline or the purpose of the charity can still be delivered within the spirit of the gift.

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