Government should give charity trustees an explicit power to make social investments and clarify their duties on the matter, the Law Commission has recommended.
The commission, which is an independent reviewer of the law, says in a paper published today that although charities are generally already permitted to make social investments and in many cases already do so, there is some uncertainty among trustees about the subject.
Its recommendations come after a consultation that began in April and received 44 responses from across the sector.
In addition to the statutory power for trustees to make social investments – which should apply unless specifically excluded or modified by governing documents – the Law Commission recommends that government should introduce statutory duties specific to social investment, and also make it clear that trustees can use permanent endowments to make social investments, providing they do not expect a negative financial return. The commission says the Charity Commission and HM Revenue & Customs should update their relevant guidance.
The paper says: "Consultees explained that charity trustees are uncertain as to how HMRC will treat social investments and are therefore concerned about the risk of adverse tax consequences, which can dissuade them from making social investments."
Luke Fletcher, a partner at the law firm Bates Wells Braithwaite, said that clarification from government would be welcome. "This feels like a victory," he said. "The marketplace has developed and charities are increasingly doing more and different types of social investment; the same thinking does not apply to investments now as it did to those made 10 or 15 years ago. This should just put the issue beyond doubt."
Fletcher said that he welcomed the Law Commission’s commitment to further investigation of legal issues around permanent endowment. "I think it has realised that there are wider issues that it needs to think about other than social investment," he said.
Hannah Kubie, a senior associate at the law firm Stone King, said she was surprised at the extent to which the response explored the permanent endowment issue.
She said the proposal was likely to be taken up by government. "We think it will move onto the statute books, probably quicker than usual – it is on the government’s agenda to get this through," she said.
But the National Council for Voluntary Organisations warned that charities, in particular charitable foundations, should not feel pressured into making social investments as a result of the Law Commission’s proposal.
Andrew O’Brien, a senior policy officer at the NCVO, said: "Social investment is likely to be a viable option for only a small number of charities. The choice to make social investments should be made freely by trustees."