Commentary on Sections Section 4: Total return investment by charities
40.Section 4 enables the trustees of a charity with permanent endowment to invest on a total return basis by making a resolution to adopt a Charity Commission total return investment scheme, where they consider that it is in the interests of the charity to do so.
41.Accordingly, Section 4 inserts two new sections in the Charities Act 2011. New section 104A enables the trustees, if a specified condition is met, to make a resolution replacing the restrictions with respect to expenditure of capital that are imposed by the terms applicable to the permanent endowment with the requirements of the Charity Commission’s total return scheme. New section 104B enables the Charity Commission to make regulations setting out the details of its total return investment scheme and procedural provisions regarding charity trustees’ resolutions to adopt the scheme.
42.Section 104A applies to all charities with permanent endowment: section 104A(1) and (5). Section 104A(2) enables the charity trustees to pass a resolution in respect of part or the whole of the permanent endowment fund where they consider that it ought to be freed from the applicable restrictions to enable investment without the need to maintain a balance between capital and income returns. The effect is that the relevant restrictions on capital expenditure no longer apply to the fund affected by the resolution; instead, the Charity Commission’s total return investment regulations apply (section 104A(4)). The charity trustees must be satisfied that this is in the charity’s interests in order to pass a resolution under section 104A(2): section 104A(3).
43.“Available endowment fund” is defined in section 104A(5); this is the same definition as is found in sections 281 and 282 of the Charities Act 2011. The effect of this definition is that section 104A applies separately to each part of a charity’s permanent endowment which is subject to separate trusts. Where a charity has more than one available endowment fund, a separate resolution will be needed for each fund that the trustees wish to manage in accordance with the Charity Commission’s total return investment scheme.
44.Section 104B sets out the Charity Commission’s power to make regulations. Section 104B(1)(a) enables regulations to be made concerning resolutions under section 104A.
45.Section 104B(1)(b) enables the Charity Commission to make regulations concerning the investment of the relevant fund on a total return basis, and the expenditure from such a fund. “Relevant fund” is defined in subsection (6), and includes both the fund affected by the resolution under section 104A and all investment returns on it, both capital and income.
46.Section 104B(2) and (3) contain illustrative lists of requirements and restrictions that may be included in the regulations made under section 104B(1)(a) and (b); it will be for the Charity Commission to decide on the specific provisions. For example, the Charity Commission may make regulations under section 104B(1)(a) requiring charity trustees to notify the Commission of the making of a resolution within a specified period of it being passed, and regulations under section 104B(1)(b) may impose restrictions on expenditure or require investment and allocation of investment returns in such a way as to maintain the long term capital value of the fund, so far as practicable. Nothing in this section affects the general duties of charity trustees, for example to have regard to both present and future needs of the charity.
47.Section 104B(1)(c) enables the Charity Commission to make regulations about action the charity trustees need to take in respect of a part or the whole of a fund if a resolution previously made under section 104A ceases to apply to it.
48.Provisions for the accumulation of income (that is, converting income to capital) may be included in the regulations made under section 104B(1)(b) and (c). Section 104B(4) states that any such provisions are not subject to section 14(3) of the Perpetuities and Accumulations Act 2009, which restricts any accumulation of income to the statutory accumulation period of 21 years.