Part 1: Purposes, Powers and Governing Documents Section 13: Total return investment
Permanent endowment can be used to make social investments (within the meaning of section 292A), provided those social investments do not contravene the restriction on expenditure of capital that applies to the permanent endowment. Accordingly, social investments with an anticipated negative financial return (where the trustees expect to receive back less than the initial capital outlay) cannot generally be made using permanent endowment. Section 13 creates a new power, by inserting section 104AA into the CA 2011, to use permanent endowment to make social investments that trustees could not otherwise make. The new power is limited to charities that have already opted in to investing on a total return basis under section 104A(2). The power will enable charities to use the fund to make social investments which they would not otherwise be able to make because they are expected to produce a loss. New regulations governing the use of the fund to make social investments will apply to the fund. Section 13(3) amends section 104B of the CA 2011 to enable the Charity Commission to make these regulations.
								Example (3): Making loss-making social investments using permanent endowment
								Charity Z is a housing charity which has permanent endowment with a capital value of £100,000 when it passes a section 104A resolution in respect of the fund. The trust for investment is valued at £100,000. The trustees want to use £50,000 to purchase Property A to be occupied by its beneficiaries at a low rent. The trustees know that the capital value of the property is likely to decrease over time and that the modest income from rent is unlikely to cover this depreciation in value. However, the trustees wish to use the money in this way because it will both further the charity’s purposes and make some financial return (within the meaning of section 292A). They also believe that they can recoup any loss over time through investing the remaining £50,000 in shares which they believe will appreciate in value and pay dividends. They cannot currently purchase Property A using permanent endowment because section 104A of the CA 2000 and the TRI Regulations require trustees to invest the trust for investment (and the unapplied total return) to produce a return. Making a social investment which is expected to produce a negative financial return does not constitute an investment for the purposes of section 104A or the TRI Regulations. However, Charity Z can pass a resolution under section 104AA enabling it to use the trust for investment (and the unapplied total return) to make social investments. The charity can choose to pass the resolution in respect of the entirety of the fund (£100,000) or only in respect of the £50,000 part of it that they wish to use to make the social investment.
	The power in section 292B of the CA 2011 to make social investments cannot be used in respect of permanent endowment if making the social investment would contravene the restriction on spending capital. Schedule 2, paragraph 23 amends section 292B to make clear that the trustees have a power to use permanent endowment to make social investments that would contravene the restriction on spending capital (i.e. social investments with a negative financial return), if they have opted in to the power in section 104AA.