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Sprinting through the Charities Act 2022
Latest on the amendments relating to legacies under the Charities Act 2022
Introduction
The third wave of amendments under the Charities Act 2022 is expected to come into force in 'early 2024'.
The first and second waves of amendments took place on 31 October 2022 and 14 June 2023 respectively. It is still unclear when the amendments relating to ex gratia payments will come into force; no anticipated timescale has been indicated for this.
A number of the amendments that have been made, and a number that are still due to be made, have relevance to legacies, and will be of interest to those working in or around legacy teams at charities. I'm providing a whistle-stop tour of the amendments under the Charities Act 2022 that, we believe, have most bearing on legacies.
Relevant amendments under the Charities Act 2022 already in effect
Automatic trust corporation status for a corporate charity trustee of charitable trust
a non-charitable company that acts as sole corporate trustee of a charitable trust will not enjoy automatic trust corporation status under new section 334A(1).
A new section 334A(1) has been inserted into the Charities Act 2011 that automatically grants trust corporation status to a corporate charity acting as the sole trustee of a charitable trust.
This amendment is of particular relevance and assistance to incorporated charities that:
(a) had not, previously, been granted trust corporation status by the Charity Commission or the Ministry of Justice; and
(b) from time to time need to take out grants of representation (which, previously, the organisation would have had to do indirectly by appointing nominees), and/or to give valid receipt in relation to land owned by a trust they are trustee of (which, previously, would not have been possible for the organisation acting alone).
It is important to remember that these amendments do not apply to non-charitable incorporated organisations. So, for example, a non-charitable company that acts as sole corporate trustee of a charitable trust will not enjoy automatic trust corporation status under new section 334A(1).
Permanent endowment developments
Legacy gifts of capital assets which impose permanent endowment restrictions usually arise where donors wish to guarantee the long-term preservation of their gift
'Permanent endowment' is a term which, in essence, describes capital property held by a charity which cannot be spent as if it were income. That can be land, buildings, cash or investments. Charities are only able to use the income arising from property held as permanent endowment to further their charitable purposes, and not the capital.
Legacy gifts of capital assets which impose permanent endowment restrictions usually arise where donors wish to guarantee the long-term preservation of their gift.
The following amendments have been made to the rules relating to permanent endowment under the Charities Act 2011:
(a) a new power to allow charity trustees to borrow monies from a permanent endowment fund. This power does not require Charity Commission approval. However, there are several criteria applying to it, including a:
- borrowing limit of 25% of the value of the fund;
- requirement for a repayment plan for any amount borrowed;
- requirement for repayment to be made within 20 years; and
- requirement to seek Charity Commission direction if repayment is not possible within the prescribed timescale;
(b) a new Social Investment power for charities which have resolved to take a ‘total return’ approach to investment (ie where any increase in the capital value of investments can be expended as well as the income generated). This allows the trustees of such charities to undertake social investment in circumstances where achievement of a financial return is uncertain or unlikely;
(c) a new definition of ‘permanent endowment’: "For the purposes of this Act, property is “permanent endowment” if it is subject to a restriction on being expended which distinguishes between income and capital.”
(d) the section 281 Charities Act 2011 power for lifting restrictions for ‘smaller’ permanent endowment funds is now exercisable on funds up to a maximum market value of £25,000; (the income generated is no longer relevant); and
(e) the deadline for objection or requests from the Charity Commission in relation to applications from the trustees of ‘larger’ endowment funds (ie section 282 Charities Act 2011) has been reduced from three months to 60 days.
Clarity that the Part 7 disposal restrictions will not apply to most multiple ownership/beneficiary scenarios
Part 7 of the Charities Act 2011 provides various restrictions for charities when disposing of charity land.
Amendments have been made to section 117 of the Charities Act 2011 clarify that the Part 7 disposal restrictions only apply to land if the whole of the land being disposed of is held beneficially by/for a charity. (In relation to a corporate charity, this means land held solely for its own benefit, and in a relation to an unincorporated charity, this means land held in trust solely for the charity's benefit).
The effect of this amendment is that in the majority of multiple ownership/beneficiary scenarios relating to an interest in land for a charity, the Part 7 disposal restrictions will not be applicable. For example, where a charity is one of several residuary beneficiaries of a legacy gift of land (held by them as joint tenants), and that land is being disposed of, the Part 7 disposal restrictions will not apply.
Exceptions to the above position, ie where the Part 7 restrictions will continue to apply, are:
(a) a charity owns land as one of multiple tenants in common and the charity's share only is being disposed of;
(b) a legacy containing an interest in land has been left to a charity, and the executor has appropriated the land to that charity; and
(c) a trustee holds an interest in land on bare trust for only one charity, and that land is to be disposed of.
Care should therefore be taken when considering appropriations.
Relevant amendments under the Charities Act 2022 due in 'early 2024'
New rules for lifting restrictions on restricted funds
Currently, two common routes for lifting restrictions applying to restricted funds are by the procedures under section 275 and 268 of the Charities Act 2011. However, changes under the Charities Act 2022 will:
(a) remove both the section 275 and 268 procedures; and
(b) replace them, and other provisions, with a new wide-ranging power (under a new section 280A of the Charities Act 2011) for trustees to amend the trusts of unincorporated charities, including restricted funds.
The new section 280A amendment power will, if the relevant criteria apply, allow the trustee/s to resolve to amend the purposes of a restricted fund; for example, to widen its purposes. However, the consent of the Charity Commission will be required for an amendment to the purposes.
If a charity has any restricted funds which could be amended under the section 275 or 268 procedures, the charity may wish to consider whether it should act to make such amendments now, in advance of "early 2024" (whenever that may be); i.e. before the new rules come into effect. This is because:
- the section 275 procedure, although it requires notification of a resolution to the Commission and gives the Commission a right to object (within a stated period), does not require the active consent of the Charity Commission; the section 280A procedure does; and
- section 280A requires analysis of the purposes of the relevant fund when it was established, even though in some cases this will be a long time ago and the purposes may in fact have been amended in the intervening period.
Certain statements required in contracts and disposal instruments
Where a legacy relates to land, and where Part 7 applies to the disposal of that land (for example, a legacy gift to one charity, which will wholly own the land), under the current rules a prescribed statement – known as a 'certificate of sale' – must be given personally by the trustees in the instrument effecting the disposal.
Amendments made under the Charities Act 2022 to section 122 of the Charities Act 2011 will require that a prescribed statement is made on behalf of the charity in a contract for sale (if any) and in the instrument effecting the disposal.
Although this amendment effectively adds to the administrative burden by mandating statements at the execution stage and also at the completion stage, it is worth bearing in mind that:
(a) it is quite common practice currently for contracts for sale to contain the 'certificate of sale';
(b) the requirement that certain statements be given by the trustees personally has been removed, meaning that staff of a charity with relevant delegated powers will be able to approve these statements; and
(c) changes already in effect (as of 14 June 2023) mean that the requirements for the scope of the advice that must be obtained and considered under section 119 of the Charities Act 2011 has narrowed, and there is now a wider pool of persons authorised to give such advice; and
Added reassurance for legacy gifts to a charity that has merged with another charity
The Charities Act 2011 will be amended so as to enable a gift to an "old" charity, which has merged with a "new" charity and the merger has been registered on the Commission's list of mergers, to take effect as a gift to the "new" charity.
This provision will apply even where a legacy gift is worded so as to require that the "old" charity must be in existence on the date that the gift takes effect. The provision will apply to gifts made after the amendment comes into effect, even if the will in question was executed prior to this date.
This will give legacy teams real reassurance that, provided a previous merger has been properly registered with the Commission, the "new" charity should not meet with challenges from executors in attempting to receive a gift to the "old" charity.