What changes came into force from 14 June 2023 as a result of the Charities Act 2022?

On 24th February 2022 the Charities Bill received royal assent becoming the Charities Act 2022. It is coming into force in stages to allow for the necessary guidance to be updated.

A number of significant changes recently came into force recently and, in part two of our three part series, we consider these changes.

How the Charities Act changes the rules on permanent endowment?

Many charities hold property (be it land or buildings, cash or investments) which is known as permanent endowment. Permanent endowment property is subject to restrictions that prevent the capital value from being spent or otherwise disposed of. Income from the property can be used by the charity (sometimes for restricted purposes), but the capital is held by the trustees permanently.

The issue that can arise is some permanent endowment property becomes more restrictive as the nature of the property involved becomes outdated. For example, an asset may no longer generate income or may cost more to maintain than it is worth to the charity.

Charity trustees must rely on statutory powers to spend or dispose of permanent endowment property. The current rules provide limited scope for such actions and, in particular, charity trustees must request Charity Commission consent if, broadly, the charity has income of more than £1,000 and the permanent endowment property has a market value of more than £10,000.

The Charities Act is changing the scope for disposing of permanent endowment so that charity trustee powers are, in some ways, becoming more flexible. Charity Commission consent will only be required to dispose of permanent endowment if the value of the permanent endowment property is more than £25,000. There will be no income element to the rules which does simplify the rules.  But, arguably, this does have the drawback that a charity with very little income which owns permanent endowment with a high value, will now require Charity Commission consent to spend that permanent endowment property.

The Charities Act also amends the time the Charity Commission has to respond to any requests for consent.  The Charity Commission will now have 60 days to respond rather than the current 3 months which will hopefully speed up the process.

The Charities Act includes a new power for charities to borrow from their permanent endowment property without Charity Commission consent, albeit up to a maximum of 25% of the value of the permanent endowment property and with repayment required within 20 years.  This will provide charity trustees with flexibility when considering how to fund the work of the charity.

Additionally, there is also a new power to allow charity trustees to make social investments that are unlikely to return a profit for the charity if the charity takes a “total return” approach to its permanent endowment investments.  A total return approach to investments means, broadly, that both the income and any increase in the capital value of permanent endowment investments can be spent by the charity trustees.

These amendments should give charity trustees opportunities to better administer their charity and carry out their charity’s purposes. Charity trustees should take the opportunity to review their permanent endowment property and consider how it can be better used to further the purposes of the charity.

Charity land and the Charities Act

A number of changes have come into force which relate to land owned by charities and more provisions regarding charity land will come into force later this year.

Currently there are many restrictions on disposing of and mortgaging charity land.

Broadly, the restrictions state that a charity cannot dispose of land without the consent of the Charity Commission.  However, Charity Commission consent is not required if the charity trustees either obtain advice from a qualified surveyor and consider and follow that advice or comply with a procedure for granting short leases.

The purpose of the restrictions is to protect charities from imprudent decisions regarding such valuable assets and ensure land is only disposed of on the best terms.

These restrictions currently apply to all charity land.  However the Charities Act has now changed how the restrictions apply and confirms that the restrictions will only apply where the whole of the land which is being disposed of is held either:

• By a charity for its own benefit and not as a nominee or in a trust for another person
• In trust solely for the benefit of that charity.

Therefore, the restrictions will apply where:

• A trustee holds land on bare trust for a single charity
• Land is left to a charity in a Will and the executor has appropriated the land to the charity
• A charity owns land as one of several tenants in common but is disposing of only its share.

The restrictions will not apply where:

• A charity is one of several joint owners of land and the land is being disposed of in its entirety
• Land is left to multiple beneficiaries (including one or more charities) under a will and the executor has appropriated or assented the land to those beneficiaries.

A real life example of how this change will be beneficial is a case involving a number of charities who were the residuary beneficiaries under a will.  The executors and beneficiaries wanted to sell the land in the estate and under the law as it then was, each of those charities was required to obtain a surveyors report.  Following the changes, it will now be possible for just one charity to obtain the report and share it with the other charities thus reducing expense.

Even with the removal of the restrictions it is still very important to ensure the disposal is in the best interests of the charity and that the best price is achieved.

Other changes being made by the Charities Act relate to the surveyor’s report which needs to be obtained in order to avoid the need for Charity Commission consent.  Currently, the individual preparing the report must be a member of the Royal Institution of Chartered Surveyors.  However, the Act allows reports to be produced by fellows of both the National Association of Estate Agents and the Central Association of Agricultural Valuers in addition to chartered surveyors.

Additionally, the charity will also be able to rely on a report prepared by an officer, employee or trustee of the charity if they are not conflicted and have the relevant skills needed to prepare the report.

Again when making a decision, it is important to consider who is best placed to advise the charity fully as some qualifications provide more relevant experience than others.

Another change is to the content of the report which needs to be produced.  Previously, there was a very rigid framework for the report but now the requirements for the reports are less prescriptive providing broad categories of advice which must be included.  This gives the person preparing the report more discretion about what information needs to be included.

The report will now need to cover:

• The value of the land
• Any steps which can be taken to enhance that value
• Whether the land should be marketed and, if so, how it should be marketed
• Anything else which can be done to secure the best terms for the charity
• Any other matters of which the adviser considers the charity trustees should be made aware.

This may reduce the cost of the report and avoid unnecessary information being included but practically this means that the charity is likely to need to be more involved in the process of obtaining the report to ensure that all of the information they need is provided.

Previously, charity trustees were required to follow the surveyor’s guidance on advertising a disposal of land.  They now have discretion when deciding how to advertise a proposed disposal and even whether they consider advertisement necessary.

The Charities Act also removes the requirement for charities to get Charity Commission authority to grant a residential lease to a charity employee for a short periodic or fixed term tenancy.  Charity trustees now only need to obtain advice on granting of the lease.

How the Charities Act impacts charity names?

The Charities Act has given the Charity Commission much wider powers when dealing with the name of a charity.  Previously, the Charity Commission could direct a charity to change its name if it was too similar to another charity’s name or if it was offensive or misleading.

The Charities Act now allows the Charity Commission to:

• Direct a charity to stop using a working name if it is too similar to another charity’s name, is offensive or is misleading (a working name is any name used by a charity which carrying out the activities of that charity)
• Delay registration of a charity with an unsuitable name or delay entry of a new unsuitable name onto the Register of Charities
• Use its powers in relation to an exempt charity in consultation with the principal regulator for that charity.

Connected persons

The definition of a connected person has been updated to remove outdated language.

Our next article in the series will cover the changes which are due to come into force as a result of the Act in the Autumn of 2023. In the meantime, if you have any questions about the points raised in this article, or about any of the changes relating to the Act, please get in touch.