The Queen has confirmed today that long-awaited changes to charity law aimed at reducing unnecessary red tape will be brought forward in this parliament in the form of the Charities Bill.

The Charities Bill will address the recommendations from the Law Commission which have been accepted by the government. Here are the reforms that we anticipate will have the most impact on the sector.

Property disposals

At the moment, for the vast majority of property disposals, a charity has to engage with a RICS qualified surveyor to produce a very detailed report on the property in question. The law does not recognise that this can often be disproportionate to the nature of the transaction as it makes no allowances as between a multi-million pound complex development and the sale of a tiny strip of land to a neighbour.

There are two key changes here that will benefit charities. 

  • the professionals that a charity can take advice from will be expanded to include Fellows of the National Association of Estate Agents and Fellows of the Central Association of Agricultural Valuers. Where a charity has a suitably qualified person on its board or amongst its employees, it will not need to look externally at all for that advice
  • the content of the report will be proportionate to the transaction and will be required to cover just four things – the market value of the property; any enhancement that would improve the price; any marketing the adviser would recommend, and any other recommendation relevant to the transaction.

In addition the adviser will need to self-certify that they have the appropriate expertise and experience to provide the advice, and that they don’t have a conflict in relation to the transaction. We anticipate this will increase the speed with which a charity can proceed with a sale if taking advice internally and may reduce the costs of the overall transaction.

Ex gratia payments

The law requires charity trustees to apply their charity's funds in furtherance of their charitable purposes. An ex gratia payment is one where

  • trustees believe they are under a moral obligation to make a payment; but
  • they are not under any legal obligation to do so; and
  • they cannot justify the payment as being in the interests of the charity

At the moment Trustees can only make ex gratia payments with the consent of the Charity Commission. A new statutory power will be introduced to allow trustees to make small ex gratia payments without the prior authorisation from Charity Commission and for those ex gratia payments to increase in line with the charity's overall gross income. 

For some charities, the trustees or indeed the founder of a charity may feel that this power goes beyond what the charity should be doing. In that case this statutory power will be able to be expressly excluded by making a change to the charity's governing document.

The new regime will also allow Trustees to delegate the decision to make an ex gratia payment to staff, albeit that they may wish to put in place reporting obligations to ensure its proper use.

This power will give charities more flexibility to respond to situations where they feel morally obliged to do something without having to incur the additional expense and possible delay caused by making an application to the Charity Commission for prior authority. 

Trust corporation status

These reforms will be relevant to all sole corporate trustees of charitable trusts. This can include charities that have incorporated using a sole corporate trustee where the charity holds some of its assets as permanent endowment. 

Where a charity has a sole corporate trustee, that trustee must have trust corporation status to be able to effectively deal with the charity's assets. 

The plan for the future is that trust corporation status will be automatic for all sole corporate trustees, removing the headache that used to be involved in obtaining this status.

Governing documents

At the moment, the way in which a charity can amend its governing document is dependent upon its legal form with the number of hoops trustees must jump through before making such changes varying significantly. Typically long established charities have the hardest time making changes even though the circumstances they now find themselves in may be wholly different to those that existed when they were created.

For unincorporated charities in particular, the current regime is highly restrictive.

The Charities Bill will seek to harmonise the regime to the extent possible. This will mean, for example, the Charity Commission having to consider the same test for all charities wishing to make regulated alterations (that is changes to a charity's objects, any clause which allows a trustee to benefit from the charity, and the provisions stipulating what happens to a charity's assets on dissolution).

The Charity Commission will need to look at a three part test:

  • the original purposes of the charity
  • the desirability to keep the purposes close to the original purposes
  • the need for the charity to have purposes which are suitable and effective in light of the current economic and social circumstances.

The Charity Commission will also be able to give public notice of proposed changes (or require trustees to do so). 

For unincorporated charities there will be additional circumstances in which consent is required, including where the changes relate to permanent endowment restrictions or change constitutional rights of third parties.

Borrowing from permanent endowment

A charity has permanent endowment if it holds assets upon trust where trustees may only apply the income to further the charity's charitable purposes, and the capital must be held forever. Charities with permanent endowment can find themselves sitting on a substantial investment portfolio but being unable to meet a current need of their beneficiaries. 

The Charities Bill will introduce a statutory power which will allow trustees of a charity with permanent endowment to borrow up to 25% of it, provided they recoup those funds over a period of 20 years (without obtaining Commission consent in advance).

Permanent endowment and social investment

Where a charity has a permanently endowed investment portfolio and it has adopted a total return approach to investment, allowing it to combine income and capital returns on investment, it must currently invest in such a way that achieves the best financial return for the charity.

The government plan to introduce a new statutory power that will allow trustees to release permanent endowment restrictions to make social investments with a negative or uncertain return (which would otherwise not be considered investments). This ties in with the statutory power to make social investments which has already been introduced under the Charities (Protection and Social Investment) Act 2016.

Evolution rather than revolution

These reforms do not represent a fundamental shift in the law that applies to charities. It is more a tinkering around the edges, a tidying up of inconveniences and a relaxation of the regulatory environment where it is felt that this is appropriate.

We anticipate two key areas of impact from these reforms. First of all they will further limit the circumstances in which a charity will need to engage with the Charity Commission before taking action. Secondly, they are designed to make life that little bit easier for charities, allowing quicker responses to opportunities and to conduct their business in an effective, sustainable and impactful way.

We very much welcome the government's announcement today that the Charities Bill is to be included in the next programme of legislative reform.