Sophie Peach
- Solicitor
- Charity Law & Not-for-Profit
Restricted funds: unlocking value for more effective use
A charity may find itself managing a growing number of restricted funds, particularly where it has a long history, receives legacies for specific purposes or regularly fundraises for restricted projects.
Over time, those funds can become administratively burdensome and may leave charitable resources underused where their purposes are no longer practical or sufficiently flexible. Fund rationalisation is rarely at the top of the agenda, but it may be worth revisiting. Updated statutory powers available to charities can make the exercise more straightforward than it once was and, where approached carefully, rationalisation can reduce administration and unlock value for more effective use.
Identify what is really restricted
The starting point is to determine the true nature of each fund. Trustees should carry out a proportionate review of the available documents, which may include wills, trust deeds, appeal wording, donor correspondence and historic board minutes.
The aim is to identify the fund’s purpose and whether the restriction is legally binding. A fund labelled in the accounts as “restricted” may, on closer inspection, reflect a non-binding donor “wish”, “preference” or an internal designation. Equally, a fund with limited records may still be subject to legally binding trusts.
The key is to avoid creating restrictions by assumption, while recognising and respecting those that are properly evidenced.
Separate the quick wins from the difficult cases
Following that initial review, the funds can usually be grouped into categories. Some may be unrestricted funds that have simply been designated internally – these can usually be redesignated or released by trustee decision. Others may be restricted income funds, where the whole fund can be spent but only for a particular purpose. If that purpose remains workable, the fund may be capable of being transferred into a broader fund with a compatible purpose.
The more difficult cases are those where the fund’s purpose itself needs to change. This is where the statutory powers under the Charities Act 2011 become important.
Use the statutory regime to modernise purposes and powers
For unincorporated charities, including funds held on charitable trusts, s.280A of the Charities Act 2011 enables trustees to amend trusts by resolution where they are satisfied that the amendment is expedient in the interests of the charity.
This can be particularly useful in a rationalisation exercise. If the change is administrative only, the trustees may be able to use s.280A without Charity Commission consent. This might include adding a clear power to transfer assets to another fund, where the existing documents do not already provide an adequate mechanism to support the intended consolidation.
If the consolidation requires an amendment to the fund’s purposes, Commission consent must be obtained before the amendment can take effect. In practice, the application should explain why the existing purpose is no longer workable, how the proposed broader purpose remains close to the donor’s intention (where possible) and how the change would enable the charity to achieve greater impact.
For charities dealing with a significant number of funds, a staged approach may help. Starting with the clearest cases, such as funds with plainly outdated purposes or closely aligned proposed purposes, can help trustees build a clear evidence base and make any Commission engagement more manageable.
Treat permanent endowment separately
Permanent endowment can be difficult to identify. Broadly, it is property that the charity must keep rather than spend, such as money given for investment where only the income may be spent. In some cases, funds may have been treated as permanent endowment historically even though the documents do not show a binding requirement to retain the capital. Where the evidence supports that conclusion, trustees may be able to reclassify the fund by resolution as part of the rationalisation exercise without using the statutory permanent endowment regime.
Where a fund is permanent endowment and trustees want to spend the capital, the process depends on value. For funds with a market value of £25,000 or less, trustees may usually do so without Commission authority if they are satisfied that spending capital would better achieve the fund’s purposes. For larger funds where market value exceeds £25,000, Commission consent is required before the capital spending restriction can be released. The application for consent should set out the financial position, any known donor wishes, current beneficiary needs and any change in circumstances since the fund was established.
The practical point is to identify permanent endowment early and to sequence any reclassification, purpose changes and/ or capital release resolutions carefully.
Watch out for fundraising appeals
These appeals can create separate issues. Donations raised for a specific purpose must be used for that purpose unless the appeal wording allows otherwise.
If an appeal raises more than needed, trustees should check whether the wording includes a secondary purpose. If it does not, they must agree new charitable purposes for the surplus, having regard to the similarity to the original purpose and the suitability in current circumstances. Where the surplus exceeds £1,000, Commission authority is required before the resolution can take effect – this should be factored into the rationalisation timetable.
The practical lesson for future appeals is simple: include a clear secondary purpose from the outset.
Key takeaway for trustees
A fund rationalisation exercise should not be presented simply as administrative spring cleaning. Reducing the administrative burden of managing multiple small or historic funds is valuable, but the stronger case is that rationalisation can bring charitable resources back into active and effective use.
Trustees should be clear about why the existing restrictions inhibit impact, what alternatives have been considered, how the proposed combined fund will operate and how the change supports current beneficiaries.
Done well, fund rationalisation respects the original wishes of the donor by ensuring that funds remain workable, effective and relevant for today’s beneficiaries.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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