25: Charities – how can you make permanent endowment work for you?

Given the ongoing pressure on charity funding, many charities are looking for ways to free up available cash, which can mean looking at ways to release restrictions on funds. Many charities receive donations where donors place restrictions on how the gift can be used. Such stipulations can take many forms and have different legal effects, depending on the terms of the gift. In some cases, the restrictions will mean that the gift is ‘permanent endowment’ which can have implications over how the gift needs to be managed by the charity trustees, how it needs to be dealt with on any merger or incorporation of the charity and how the capital and income of the gift can be used.

What is permanent endowment?

The statutory definition in charity legislation states that permanent endowment is created where there is a restriction on spending the capital element of a gift, whether or not the restriction is to be applied permanently. This definition is not always applied correctly; some refer to ‘permanent endowment’ instead as a fund which necessarily has a ‘permanent’ restriction on spending that capital of the fund. The statutory definition is important when considering whether powers available under charity legislation to release restrictions will be available to trustees (see further below).

There are two main types of permanent endowment:

• functional permanent endowment – this is usually land (also known as designated land) which trustees are required to use for the purposes of the charity, such as a building to be used as a school; and
• investment permanent endowment – this will be a capital gift which trustees must use to generate an income for the charity but cannot spend the capital lump sum itself.

Permanent endowment should not be confused with a restricted fund, namely where there are restrictions on the practical application of a gift, but ultimately both the capital asset (whether land or liquid assets) and the income it generates can be used for the specified reason. Examples of restrictions could be funds which can only be used to help a portion of the charity’s beneficiaries, or perhaps can only be applied for a certain appeal.

How do I know if a gift is permanent endowment?

The answer to this is often found in the terms of the gift (such as a will or grant agreement), a charity’s governing document (if the gift of permanent endowment started the charity), or perhaps correspondence with the donor at the time the gift was made.

The relevant document will normally indicate that the donor intended the capital gift to be held long term, if not permanently – often the use of words such as ‘forever’ or ‘in perpetuity’ are very likely to create permanent endowment. However, it is not always entirely clear, for example where the terms of the gift provide the trustees with a power to spend income but are silent on the use of the capital asset. Whether a donor creates a permanently endowed gift is therefore a matter of construction or interpretation; each gift must be considered on a case by case basis.

How can permanent endowment assets be realised?

Trustees may consider that the gift, however gratefully received, may better serve beneficiaries if the charity were able to spend its liquidated value, for example the proceeds of sale of a property. As noted above, this is likely to be a greater pressure at present, where cash flow and reserves may be low because of ongoing impact of the pandemic.

Because there is a legally binding restriction on the use of the gift, this creates a ring-fenced trust either within the general assets of an unincorporated charity or as a separate trust linked to an incorporated charity (where the parent charity is the corporate trustee). The first question is therefore who are the trustees of the trust holding the permanent endowment and any income and capital returns it creates.

From here, trustees should consider what powers they have available to them to enable them to release the restrictions. As indicated above, there are statutory powers in charity legislation (the Charities Act 2011) and depending on the size of the permanent endowment, there will be accompanying steps to consider, for example whether trustees require consent from the Charity Commission. Generally, trustees will not need to seek the Charity Commission’s consent if the charity has an annual income of less than £1,000, or if the total market value of the permanent endowment is under £10,000. The release of a gift of permanent endowment above these limits will require the consent of the Charity Commission (whose guidance on the topic is available here). Trustees should also consult with donors or other stakeholders, where possible. We suggest trustees seek professional advice to assist with this stage.

Other points to note

Before embarking on a project to release restrictions on permanent endowment, charity trustees should bear in mind their duty to act fairly, as between the needs of current and future beneficiaries. Trustees should therefore consider whether exercising statutory powers to bolster short term income is appropriate when balanced with their duties as custodians of the trust assets to meet beneficiaries’ future or long term needs.

It is also worth noting that, where possible, opening up productive conversations with prospective donors early on, so to make a case for allowing flexibility on future gifts, could be a way to avoid restrictions from inception. Explaining the practical implications for a charity in creating permanent endowment restrictions, such as difficulties in using funds and the administrative burden of maintaining them, could be useful, particularly if donors do not appreciate the obligations they would be creating.

The key, as with most considerations for trustees, is the need to act prudently and in furtherance of the charity’s charitable purposes and to engage in a proper decision-making process. Having done so, the trustees may consider that, due to the current pressures on the charity, it would be in the best interests of the charity to realise permanent endowment. The Commission discusses this in its COVID-19 guidance available here.

We would be pleased to discuss the terms of a gift, to help discern if it is permanent endowment, and if so where to go from there.