Keep it legal: Spending capital

Many charities hold property, subject to it being used for particular purposes.

They may also have permanent endowments of land or investments where, generally speaking, only the land itself or the income generated by the investments can be used for the charity's purposes. In other words, the land cannot be sold and the proceeds spent, unless the land is subsequently replaced. Nor can any capital sum that is invested be spent. Both have to be preserved in perpetuity.

In these situations, it is often the case that, over time, the income generated by the capital fund may become so small that it is of limited use. The Charities Act 1993 created a mechanism to facilitate the expenditure of capital as well as income, and these possibilities have now been extended by the Charities Act 2006.

As with the 1993 act, the provisions do not apply to charitable companies, because charitable companies cannot hold permanent endowment property. The new act does, however, extend the scope of what might be spent and simplifies the process for smaller funds.

In relation to endowment funds with gross annual income of less than £1,000, trustees may simply resolve that the fund - or a part of it - ought to be freed from the restrictions on expenditure. The fund can then be spent without any restrictions, without any need to obtain consent from, or even inform, the Charity Commission.

A different procedure applies if the fund has a gross annual income of more than £1,000, its market value is more than £10,000 and the property was entirely given by a single donor, or by two or more for a common purpose. In this case, trustees wishing to release funds from the restrictions must pass a resolution and then forward this to the commission, along with the reasons for the resolution.

The commission can direct the trustees to give public notice of the proposals. Where this is done, the commission must take into account any representations by members of the public made within 28 days, any evidence regarding the wishes of the donor and any changes in the circumstances of the charity. The commission must decide within three months whether to sanction the resolution.

 - Phil Watts is a senior manager of the charities team for Anthony Collins Solicitors

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