On 24 February 2022, the Charities Bill received Royal Assent and passed into law as the Charities Act 2022. The recommendations from the Law Commission formed the basis for the new legislation, and the Act is designed to give charity trustees greater flexibility to manage charities more effectively. We do not consider the changes will impact significantly on charities’ daily operations, but they will simplify certain areas of regulation.
What are the main changes that will affect churches and Christian charities?
Amending your governing document
The new legislation will make it easier for charities to amend their governing documents. Previously, different rules applied depending on whether your charity was incorporated (such as a company or a CIO) or unincorporated (such as a trust or an unincorporated association). The Charities Act 2022 introduces a more straightforward process, allowing the Charity Commission to apply the same test for all charities wishing to amend their governing documents. This should make the process quicker and easier, especially for churches and charities that are set up as trusts and unincorporated associations.
However, certain amendments will continue to require the prior consent of the Charity Commission, known as “regulated alterations”. These are changes to a charity’s objects, its dissolution provisions, or to provisions relating to trustee benefits.
Sale of land
Charities will now have access to a much wider range of professional advisers on the sale of land and buildings. The Act also introduced more straightforward rules on what advice charity trustees must receive before selling. Rather than having to engage a RICS-qualified surveyor to produce a detailed report on a property to be sold, charity trustees can now take advice from a broader pool of surveyors. If a charity has a suitably qualified trustee on its board, you need not engage external advice at all.
In addition, the level of detail included in the report can now be tailored to the size of the transaction in question. The report now only has to four factors in relation to the property: market value, any work that would improve the price, the marketing recommended by the surveyor, and any other relevant recommendation.
The new legislation introduces greater flexibility in the use of permanent endowment. However, the majority of the legal restrictions concerning permanent endowment have stayed in place, especially in relation to land and buildings.
The area which has been expanded is in relation to investments that are held as permanent endowment. This happens, for example, where a church owns a building which was given to it on the basis that it would hold that property for ever. If the church sold the building but did not use the net sale proceeds to purchase another property, but instead invested the funds to produce income, those investments would replace the building as a permanently endowed fund.
The new legislation has introduced greater flexibility in the way charity trustees are able to borrow or invest using the assets of a permanently endowed fund. In relation to borrowing, charity trustees are now allowed to borrow up to 25% of the value of the fund. In relation to investing, charity trustees are now allowed to use permanently endowed funds to make “social investments” rather than having to use the funds to make investments simply to produce the best financial return.
“Social investment” is where a charity either applies or uses its assets, or takes on a commitment in relation to a liability of another person (such as a guarantee), with a view to both directly furthering the charity’s purposes and also to achieving a financial return for the charity.
Paying trustees for goods
Charity trustees can now be paid for goods supplied to their charity in certain circumstances, without prior consent from the Charity Commission, even if that ability is not expressly stated in the charity’s governing document. Previously, charity trustees could only be paid for the supply of services. The new Act allows charities to pay their trustees to provide the goods they need to further the charity’s purposes, where it is in the best interests of the charity to do so (for example, if the trustee can provide the goods at a cheaper price).
To make it easier for charities to merge, the new legislation allows a charity’s assets to be transferred by way of a vesting declaration, taking away the need for any other legal documents to complete the transfer. This also removes the need to retain a “shell” charity to receive any legacies left to the merged charity which do not expressly provide for the merged charity to receive the legacy.
Trust corporation status
Where a charity has a sole corporate trustee, it is necessary sometimes for that trustee to obtain trust corporation status. This is relevant where a church or charity that was set up as a trust, for example, transfers everything to a CIO and the CIO becomes the sole trustee of the old charitable trust (perhaps to receive future legacies or to hold permanent endowment).
Trust corporation status is usually needed to enable the outgoing individual trustees to retire as trustees but also, importantly, it will enable the corporate trustee to sell any land owned by the charitable trust. Unless a sole trustee has trust corporation status, it will not be able on its own to give a valid receipt to a buyer.
Before the Charities Act 2022, trust corporation status was usually obtained by applying to the Charity Commission for a Scheme to appoint the corporate entity as the sole trustee. The new legislation grants automatic trust corporation status to any company or CIO which is a charity and also the trustee of a charitable trust. This will reduce a lot of red tape and make much of the processes easier in relation to charity restructurings.
Failed fundraising appeals
Charities will be able to take advantage of simpler and more proportionate rules on failed fundraising appeals. This can happen where a fundraising appeal either raises too much money for a specific project, or not enough.
The new rules allow donations to be applied cy-près (i.e. transferred to another charitable purpose which is as close as possible to the original purpose) rather than having to be returned to donors. They also remove the six-month rule – where the donor was able to make a claim for the return of their donation for up to six months.
“Ex gratia” payments
Ex gratia payments are payments by charities which do not of themselves further the charity’s objects, but which the trustees feel morally obliged to make. A frequent example of this is where a gift in a Will has failed, but the trustees feel obliged to honour the gift.
Ex gratia payments were subject to strict rules, but the new legislation relaxes these so that certain small payments will no longer require Charity Commission approval (between £1,000 and £20,000, depending on the charity’s annual income). It also permits trustees to delegate this decision to members of staff of the charity.
When will the changes come into effect?
The Charity Commission is now in the process of implementing the legislative changes, which will happen gradually from now until autumn 2023. The Charity Commission will update its guidance to reflect each part of the Act, and consult with specialists as necessary.
What action should you be taking or considering?
- Check your governing documents, especially in relation to the appointment of your trustees.
- Consider whether you need to pay any trustees for the supply of goods. If it is not urgent, it may be best to wait for the new power to come in.
- Make sure you get to grips with the new rules on how to deal with charity land, including in relation to property legacies.
- Review and consider whether to retain any shell charities. Consider registering any mergers (including historic mergers) on the Register of Charities.
- If you are looking at merging or restructuring where trust corporation status may be needed, consider whether it is appropriate to wait until the new rules are in force.
- If you are looking to change your charitable objects and you are a trustee of a larger unincorporated charity then, unless the changes are urgent, it is likely to be better to wait until the new rules come in, as they should make it easier to change your objects.
- If you are looking to change your charitable objects and you are a trustee of a smaller unincorporated charity, it may be better to press ahead now using the current statutory power for small charities to change your objects.
- If you are looking to make administrative changes to your governing document – for example, amending trustee powers or the processes around the appointment of trustees – then it will probably be better for you to go ahead with making those changes, as it is unlikely that there will be any benefit for you in for the new rules to come in.
We would be happy to provide further advice or assistance on any of the aspects mentioned in this article.
This information has been provided by solicitors working for Edward Connor Solicitors. It is designed for the purpose of knowledge sharing only and does not constitute legal advice.