Keep it legal: Permanent endowment

Permanent endowment is a legal term describing a situation in which capital has been given to a charity on the understanding that the income from that sum can be applied for the purposes of the charity, but the original capital should not be spent.

Permanent endowment property may be sold, but the proceeds of sale must also be treated as permanent endowment and as such can be used only to buy replacement property. 

Section 96(3) of the Charities Act 1993 states that "a charity shall be deemed, for the purposes of the act, to have permanent endowment unless all property held for the purposes of the charity may be expended for those purposes without distinction between capital and income".

The Charity Commission takes the view that, where a charity's governing document is silent on the point, its property will be presumed to be permanent endowment unless the trustees can produce evidence to show otherwise.

Section 75 of the 1993 Act contains a very limited power for small, unincorporated charities with a gross annual income not exceeding £1,000 to spend their permanent endowment assets, provided that those assets do not consist of any land. Otherwise, expenditure of permanent endowment would be permitted under the 1993 Act only with an order of the Charity Commission, which would usually contain provision for the replacement of the amount spent.

Broadly, under the Charities Act 2006, the trustees of a small unincorporated charity can resolve that all or part of the charity's permanent endowment may be spent if they are satisfied that the charity could carry out its activities more effectively if the capital of the fund (or part of it) could be spent in the same way as the income.

The commission is expected to issue new guidance on the subject of permanent endowment shortly, so that there will no longer be the presumption that, simply because its governing document is silent on the matter, a charity's property is to be treated as permanent endowment. This new guidance, together with the provisions in the 2006 act that are due to come into force in early 2008, should make it easier for charities to spend their permanent endowments.

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