Jeremy Wright, the Attorney General, has today applied to the High Court to unlock £475m from the National Fund charity so the money can be used to reduce the national debt.
But Steve Reed, the shadow minister for civil society, said he was disappointed the government had ignored calls for the money to go to charities and the move was further evidence of the government "sidelining" the voluntary sector.
The fate of the fund is one of the sector's longest-running sagas. It was created in 1928 with £500,000 to pay off the entire national debt.
But it has never spent a penny on its charitable objects and, according to the Attorney General's office, has never been worth more than 0.066 per cent of the national debt.
The UK public sector net debt was more than £1.7tn in November last year, according to the Office for National Statistics.
The Attorney General’s office said in a statement that the money would finally be freed from "legal limbo" and "further help the country build an economy that works for everyone".
Wright said: "We have been working with the Treasury, trustees and the Charity Commission to find a solution consistent with the donor’s original objectives of extinguishing the national debt.
"I am applying to the High Court to ask that the fund is released and, if that application is successful, the fund could be used to benefit the nation by helping to do what the original donors intended."
A spokeswoman for the Attorney General’s office said it was "required to adhere as closely as possible to the purpose of the fund and to respect the wishes of the people who have contributed to the fund".
She added: "There is also the wider point that if we deviated from the donors’ wishes in this case it would set a precedent akin to organ donation: you would be less likely to be a donor if you thought there was a risk your wishes wouldn’t be respected once you were gone."
Reed said in a statement that the money would be better spent on charities.
He said: "This £475m would be a tidal wave of support for small charities, but it's a drop in the ocean compared with the national debt.
"In fact, the national debt is rising so fast that by the end of the same day this payment is made towards it, the debt will have risen by nearly the same amount.
"This government never misses a chance to sideline charities. Here's a real chance to do some real good, but the government is threatening to do nothing instead."
The fund has more than tripled in value over the last 20 years to its current £475m, according to its latest accounts for the year ending 5 April 2017.
It earned £7.4m last year and spent £1.1m on fees, mainly to investment managers, who received £590,000, and Zedra Fiduciary Services (UK), the sole corporate trustee, which received a £355,000 management fee.
Zedra said in a statement that it had considered options for the fund when it succeeded Barclays Fiduciary Services as trustee last year.
It said: "Zedra investigated at that time the possibility of amending the trust to allow for the trust to become grant-making and perhaps for the fund to be distributed to good causes to fulfil a greater public benefit. However, this was quickly discounted as being impractical."
A Zedra spokesman said the Charity Commission felt the proposal "was not wholly consistent with the original aims of the trust".
A commission spokeswoman said the Attorney General's office had decided what to do with the funds, but it had "worked closely" with his office on the issue and welcomed today's development.
She added: "It is important that these considerable funds are applied, and applied in line with the charitable intentions of the original donor."