Keep it legal: Shell charities and mergers

Charity secretaries may find that they are managing a 'shell charity' alongside the main charity to avoid losing legacies after a merger or incorporation.

The old charity is kept on the register to receive any legacies or other gifts and transfer them to the successor body. Such arrangements can now be avoided, but it is not always appropriate to do so.

The Charities Act 2006 introduced tools to ease mergers, including a register of mergers. Once a merger is registered with the Charity Commission, most subsequent gifts and legacies left to a pre-merger charity will automatically be transferred to the merged charity.

This process is available for mergers where one of the merging charities receives the property of all of the others and those where the merging charities transfer their property to a newly created charity. It is, however, a requirement that the transferring charities cease to exist on or after the merger.

A merger can be registered, no matter how long ago it took place, by completing a form with details of the merger. It is important to note that only gifts taking effect on or after the date of registration of the merger or transfers on incorporation will automatically be received by the post-merger charity. The existing law takes its course in relation to earlier gifts. Where the timing is important, it is possible to make a conditional notification of the transfer before it takes place.

It is also important to be aware that there are circumstances where gifts will not transfer automatically. One is where a pre-merger charity held a permanent endowment and receives a gift that is intended to be held as part of that permanent endowment: the gift will not automatically transfer to the successor charity.

In addition, some legacies may be worded in a way that prevents the gift being transferred to the merged charity, even where the merger is registered. The Charity Commission advises charities that may receive significant legacy income to take legal advice before dispensing with a shell charity.

- Shivaji Shiva is a partner in the charity team at Russell-Cooke Solicitors.

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