Implementation of the Charities Act 2022

The Charities Act 2022 contains some key changes. These have been introduced gradually, with all but the proposed change to the law on ex gratia payments now being in force.

The changes in the Charities Act 2022 were welcomed, as they have made many aspects of charity law easier to navigate and apply in practice.

Amending Governing Documents

Under the Charities Act 2022, the process has been aligned as between charitable companies, charitable incorporated organisations and unincorporated charities. Consequently, there are additional safeguards which apply to unincorporated and incorporated charities alike. The consent of the Commission, where required, is now dependent on:

1. The purposes of a charity when it was first formed;
2. The desirability of securing proposed purposes similar to the purposes being altered; and
3. The current social and economic purposes.

Regulated alterations

If a charity intends to make certain changes to their governing documents, there are certain alterations which require the Commission’s consent. Together these are known as regulated alterations and are as follows:

1. Changing the charity’s purpose;
2. Providing a benefit to a trustee, member, or connected people or organisations;
3. Amending what happens to property when a charity is closed;
4. Changing the use of permanent endowments;
5. Amending third party rights; and
6. Making changes which are proposed to be made without the requisite third party approval.

The regulated alterations numbered 1-3 above apply to both incorporated and unincorporated charities, whereas alterations 4-6 apply only to unincorporated charities.

Other changes

The Commission may also require public notice to be given if the changes are considered to be controversial or of public interest. The Commission can either request the charity to give this notice, or they can do it themselves.

Any changes take effect on the day the charity received the Commission’s authority (except in the case of the alteration of a CIO’s purposes which takes effect only when registered by the Commission) and a resolution passed by the trustees or members (which may state a later date for the change to take effect if desired).

Various miscellaneous provisions which apply to unincorporated charities have been repealed and the new general power to amend the governing documents referred to above is considered to replace these.

Charity Land

Under the Charities Act 2022, the restrictions on dispositions of property now only apply where the whole of the land which is being disposed of is held beneficially by a charity solely for its own benefit or in trust solely for that charity. There are certain situations where the restrictions do not apply, such as where a charity is one of several tenants in common of the land and the entirety of the land is being disposed of by the trustees of the land.

There are also certain exceptions to the restrictions, including dispositions by a liquidator, leases being given to a beneficiary, and releasing a rent charge, among others.

Certain requirements must be satisfied, including:

• The charity must have the power to dispose of the land.
• Advice must be sought, which involves a written report being produced for the trustees. Prior to the changes, this report must have been produced by a member of the Royal Institution of Chartered Surveyors (RICS) but this requirement has been relaxed. The report must now be produced by a ‘designated advisor’ – a person reasonably believed by the charity trustees to have ability in, and experience of, the valuation of land of the particular kind and in the particular area in question. The purpose of this report is to ensure the trustees are certain that the disposal is in the best interests of the charity.
• Advertising and reporting – there is no longer an automatic presumption that the proposed disposition must be advertised, but the trustees must be satisfied the terms are the best that can be achieved for the charity.
• The authority of the Commission – if a charity does not intend to comply with the above, authority must be sought in order to proceed with the disposal.
• Statements in disposal documents – there must be specific statements included in the disposal documents, and this now extends to contracts for sale, as well as transfers and leases for a period of over 7 years. The exact wording of the statement depends on the circumstances of the sale, and Land Registry practice guide 14 assists with the wording of the statement to be included.

Mergers

In deciding whether to merge, charity trustees must make their decision in line with their duties as trustees, considering the objectives of the charity, the impact of the merger on the beneficiaries, and the costs, risks and barriers to the merger.

It may be possible for a charity’s assets to be transferred if it furthers the purpose of the charity. Therefore, if the receiving charity has wider purposes than the transferring charity it is likely to have to place restrictions on how the assets can be used.

There may also be power to merge in the charity’s governing documents – for example permitting a merger or simply allowing the trustees to do anything which is desirable to achieve the charity’s purposes.

Due diligence will be required to ensure the merger is in the best interest of the charity, and following the decision relevant groups and stakeholders should be informed.

Following completion of the transfer, the Commission may be informed so that the charity can be closed and removed from the register. However, consideration should be given as to the effect of this and whether it is appropriate.

One positive change following the implementation of the Charities Act 2022 is that a merged charity can now receive any gifts or bequests which were made to the transferring charity, prior to the merger. Therefore, the transferring charity should no longer need to be maintained as a dormant charity to receive the gifts or bequests.

Charity Names

The Commission is now able to:

• Direct a charity to stop using a name if it is too similar to another charity’s name, if it is offensive, or if it is misleading. This applies to working names of charities which is any name that is used to identify the charity, and under which the charity’s activities are carried out.
• Delay the registration of a charity if it has an unsuitable name.
• Use its powers in relation to exempt charities in consultation with the principal regulator for the exempt charities.

If a charitable company is choosing a name, whether that be the official or working name of the charity, there may also be further documentation required – including approval from Companies House and the Commission. Lodders are able to advise on the suitability of proposed official and working names of charities if requested.

Permanent Endowments

“Permanent endowment” is essentially money or assets given to a charity for investment, or property which may not be expended. The charity must keep rather than dispose of these assets, such that if the endowment is money then only the investment income can be spent.

The Charities Act 2022 introduced statutory powers which:

• Simplify the way charities can spend the permanent endowment – allowing them to spend up to £25,000 without the permission of the Commission, and reducing the time frame to 60 days for the Commission to provide permission for spending above £25,000.
• Allows trustees to borrow from the permanent endowment – this permits borrowing of up to 25% of the value of the fund without seeking permission. This must be repaid within 20 years and a payment plan must be put in place for full repayment of the borrowed amount.
• Allows trustees to use permanent endowment to make social investments – this is a new power for charities who have opted into investing on a total return basis which allows them to make social investments with a negative or uncertain financial return.

Charities may now consider a review of their assets and funds to determine what falls within the definition of a permanent endowment and whether the changes could be utilised to enable the charity to meet its purposes more effectively.

Remuneration of Charity Trustees

The new Charities Act 2022 changes the provisions of the Charities Act 2011 to now allow for trustees to be paid for services or goods. This means that charities will not need to include express powers in their governing documents to allow for the remuneration of charity trustees for goods supplied to the charity other than incidental to the provision of services. However, it still remains that if a governing document does not permit payment to trustees, the Commission’s permission must be sought before employing a trustee, or paying trustees.

It is important to bear in mind that prior to paying the trustee for goods or services, you must produce a written agreement, specify the exact amounts to be paid, and agree that the payment is in the charity’s best interests. The trustee who will benefit cannot take part in decisions regarding any aspect of the agreement, and the number of trustees receiving payment or benefit must be a minority in number.

Additionally, the Charity Commission has been granted the power to remunerate a charity trustee where they have done work for the charity, and it would be unfair for the trustee to not be remunerated for that work. This remuneration is known as an equitable allowance.

Failed Appeals

The Charities Act 2022 introduced more relaxed rules that enable donations given to a failed charity appeal to be applied to a different charitable purpose (i.e. to be applied cy-près) in certain extra circumstances and without as much of an administrative burden on the trustees. Donations can be applied cy-près in the following circumstances:

• Small donations – where the charity trustees reasonably believe that a donor has given £120 or less in a financial year (whether by a single donation or cumulatively over the year);
• Cash collections – where it is not possible to identify the original donors;
• Charity Commission agreement – where reasonable steps are taken to identify the donors in agreement with the Commission but this has not found the donors; or
• Charity Commission decision – where it is agreed that it is unreasonable to incur the expense in taking the steps to return the donation or it would be unreasonable for this.

This applies both where there has been either insufficient funds raised following an appeal (so the original purpose cannot be achieved), or where a surplus of funds has been raised.

The purpose for donations

When making the decision on the new purpose for which the donations should be used, the trustees must have regard to:

• the desirability of securing that the purposes are, so far as reasonably practicable, similar to the original purpose; and
• the need for the purposes to be suitable and effective in the light of current social and economic circumstances.

If the total value of the donations to be used for the new purpose is up to £1,000, the resolution is effective on the date it is passed.

If the total value of the donations is over £1,000, then the trustees must ask the Commission to authorise the resolution. The resolution is then effective on the date the Commission authorises it.

Final thoughts

These changes in the 2022 Act are very welcome and provide clarity on the areas covered. They will alleviate at least some of the administrative burdens imposed on trustees and they are generally beneficial to charities as they will allow more freedom in relation to the requirements of charity law. Henceforth charity law should be somewhat easier to navigate and operate.

Please note: This briefing provides only an overview of the law in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this briefing can be accepted by Lodders Solicitors LLP.