Part 1: Purposes, Powers and Governing Documents Section 12: Power to borrow from permanent endowment
Trustees can borrow from permanent endowment by seeking an order from the Charity Commission under section 105 of the CA 2011. Section 12 creates a new statutory power for a charity to borrow from its permanent endowment without having to seek an order from the Charity Commission under sections 284A, 284B and 284C. There is some overlap between this power and the powers under sections 281 and 282 to release permanent endowment. However, the power to borrow is more restrictive; it enables trustees to borrow a limited amount from the fund, subject to repayment. Trustees could therefore opt to use this power where they do not think it would be appropriate, or in the best interests of the charity, to release the restrictions on spending completely.
	The new power can be exercised in relation to any "available endowment fund" of the charity, meaning the entirety of the charity’s permanent endowment if it is subject to the same trusts or any part of it subject to particular trusts: see section 284A(9). The trustees can exercise the power if they are satisfied that it is expedient for the amount to be borrowed, taking into account the purposes of both the permanent endowment fund and (if different) the charity: section 284A(2). Borrowing is limited to the "permitted amount" as defined in section 284B and must be repaid within 20 years of being borrowed. The permitted amount and the repayment period can be amended by regulations: section 12(3), inserting new section 285(3). The effect of exercising the power is to release the amount borrowed from the restrictions on spending capital which applied to it when it was part of the permanent endowment fund.
								Example (1a): Borrowing from permanent endowment
								Charity X holds an investment portfolio worth £100,000 subject to a restriction that only income from those investments can be spent in furtherance of the charity’s purposes. The charity has no other permanent endowment. The investment assets constitute the entirety of the "available endowment fund". The trustees of Charity X resolve to borrow £20,000 from the permanent endowment fund. The effect is to release £20,000 worth of assets from the restriction so that they can be sold and the proceeds of that sale used to further the purposes of the charity. The trustees of Charity X will need to make arrangements for the £20,000 to be repaid within 20 years. This requires Charity X to increase the value of the capital in the endowment fund (now reduced to £80,000 worth of assets) by £20,000 within that time. The £20,000 paid back into the endowment fund will be subject to the same restriction on the spending of capital as the rest of the fund.
	Section 284A(10) clarifies how the power operates where a charity has opted in to investing on a "total return" basis by passing a resolution under section 104A(2). The effect of subsection (10) is to limit the "available endowment fund" – from which the trustees may resolve to borrow – to the value of the fund representing the capital of the permanent endowment in respect of which the section 104A(2) resolution was passed (which the Charities (Total Return) Regulations 2013 ("the TRI Regulations") refer to as the "trust for investment"). This excludes any returns from the investment of that fund which have not been accumulated to it (the "unapplied total return" in the TRI Regulations).
								Example (1b): Borrowing from permanent endowment which is invested on a "total return" basis
								Charity X decided to invest its £100,000 permanent endowment on a total return basis. It is invested in a variety of shares. The trustees passed a section 104A(2) resolution in respect of that fund. On the date on which the resolution took effect the capital of the fund was valued by the trustees at £100,000 and this forms the trust for investment. A year later the capital value of the shares has increased to £110,000 and they have paid a dividend of £5,000, providing a total return of £15,000. Charity X has not yet applied any of this return to the trust for investment nor has it spent it on furthering its purposes. Charity X wants to borrow from its permanent endowment under section 284A. The "available endowment fund" from which it can borrow is £100,000, the value of the initial investment fund excluding the £15,000 unapplied total return on that investment. If, however, Charity X decides to apply £2,000 of the investment return to the investment fund, the "available endowment fund" from which it can borrow increases to £102,000.
	Section 284B provides the formula for calculating the "permitted amount" which can be borrowed under section 284A. It is designed to ensure that a charity cannot borrow more than 25% of the total capital value of the available endowment fund (although if the value of the remaining capital subsequently falls, the result might be that the charity’s outstanding borrowing exceeds 25% of the total capital value of the endowment fund). In calculating the permitted amount, "V" is the value of the available endowment fund from which the trustees are seeking to borrow. It does not include the value of any other permanent endowment that is subject to separate trusts, for example functional permanent endowment. "V" is defined as the value of the available endowment fund on the "relevant date", namely, the date on which the trustees resolve to borrow from the fund. This does not require the trustees to seek a valuation on the same day that they pass the resolution but it will require them to use a fairly recent valuation, and if the trustees have reason to believe that the valuation is out of date by the time they pass the resolution they should obtain a fresh valuation.
								Example (2a): Calculating the amount that can be borrowed from permanent endowment
								On 1 January, Charity Y had permanent endowment valued at £100,000. On 30 January the charity trustees resolved for the first time to borrow £10,000 from the fund. On 1 June the trustees want to calculate how much more money they could borrow from the fund under section 284A if they passed a resolution that day. To calculate the available amount they must first identify "V", the value of the charity’s permanent endowment on the relevant date. The relevant date is 1 June and, assuming the value of the fund has remained static since the initial borrowing on 30 January, "V" is £90,000. They must then identify "B", the total outstanding borrowing from permanent endowment on that date. "B" is £10,000. The available amount is therefore (0.25 x (£90,000 + £10,000)) - £10,000 = £15,000.
								Example (2b): Calculating the amount that can be borrowed from permanent endowment
								On 1 January 2021 Charity Z had permanent endowment valued at £100,000 comprising £50,000 worth of shares and an investment property worth £50,000. On 30 January the trustees resolved to borrow £5,000, selling shares to realise that sum. On 1 June the trustees resolved to borrow a further £10,000, again selling shares to realise that sum. On 1 September the trustees repaid £5,000 of their borrowing by purchasing £5,000 worth of shares to be held subject to the same restrictions as the rest of the permanent endowment fund. On 1 January 2022 the trustees want to calculate the maximum amount they can borrow from the fund. The investment property is now valued at £55,000 but the shares have remained at the same value. The total value of the shares is therefore £40,000. "V" is therefore £95,000 (the value of the property plus the shares on 1 January 2022). "B" is £10,000 (the total borrowing of £15,000 minus the £5,000 repaid). The permitted amount is therefore (0.25 x (£95,000 + £10,000)) - £10,000 = £16,250.
	Example (2b) assumes that Charity Z’s investment property is held within the same "available endowment fund" as the £50,000 worth of shares. The calculation would be different if the property were held on separate trusts, or if it were held subject to a restriction that it be used solely for the purposes of housing beneficiaries of the charity (that is, functional permanent endowment). In that case the permitted amount calculation would be based on an available endowment fund of £50,000, the value of the shares alone.
	Section 284A(2)(b) requires charity trustees exercising the power to put in place appropriate arrangements for the amount borrowed to be repaid within 20 years of being borrowed. That 20-year period runs from the date on which the borrowing is drawn-down, and not from the date of the trustees’ resolution to borrow (if that date is different). The charity’s compliance with that plan will need to be accounted for in whatever form of accounts the charity in question is required to prepare.
	Section 284A(5) allows the trustees, when re-paying an amount borrowed from permanent endowment, to pay an additional sum (the "maximum estimated capital appreciation"). That additional sum reflects the fact that, had the trustees not borrowed from permanent endowment, the capital value of the permanent endowment might have increased (for example, in Example (2b) above, the capital value of the shares might have increased). The decision whether to pay an additional sum must be made in the light of the trustees’ general duty of even-handedness, that is, to balance the interests of current and future beneficiaries. If, for example, the amount borrowed would otherwise have been placed in an interest-bearing bank account (as part of a mix of investments across the portfolio as a whole), the capital value of that sum would have remained unchanged, so the trustees are unlikely to pay an additional sum. If, by contrast, the remaining permanent endowment fund is invested in assets which yield an income but no capital appreciation, the trustees might decide that they should pay an additional sum in an attempt to maintain the capital value of the permanent endowment in real terms. The maximum estimated capital appreciation is capped in line with an inflation index to be chosen by the trustees: section 284C.
	Section 284D requires trustees to seek an order from the Charity Commission providing directions as to how to proceed if at any time they do not think they will be able to repay the borrowing as required under section 284A. Subsection (2) lists, non-exhaustively, some suggestions as to what such directions could include.