The Law Commission – the independent body that reviews UK law and recommends changes where needed to ensure fairness, simplicity and cost-effectiveness – has recommended new rules to clarify the powers and duties of charities and foundations in making social investments.
The changes are intended to counter the difficulties that may be faced by charity trustees under the current law when making social investments.
The Law Commission said that while many charity trustees make social investments without having any concerns about the scope of their powers and duties, some trustees are unsure whether their powers under the charity’s governing document or under general law authorise these investments.
It said there was also a misconception that charity trustees had a duty to maximise financial returns when making a social investment, and that certain duties under the Trustee Act 2000 were not designed with social investment in mind.
The proposed changes include the creation of a new statutory power for charity trustees to make social investments, which will apply unless it is excluded or modified by the charity’s governing documents.
A number of statutory duties specific to social investment will also be created.
In the case of charitable trusts, these will replace the investment duties imposed by the Trustee Act 2000.
These duties are:
- When making a social investment, charity trustees must be satisfied it is in the charity’s best interests to do so, having regard to the expected furtherance of the charity’s objects and the expected financial return
- Charity trustees must periodically review the charity’s social investments and consider whether they should be varied
- When making a social investment and reviewing an existing social investment, charity trustees must consider taking advice
The new rules also make clear that charity trustees are permitted to use permanent endowment to make social investments, provided they expect the capital value of the endowment to be preserved.
The Law Commission has also said there is “considerable concern” among charity trustees that legitimate social investment may not be recognised as such by HM Revenue & Customs (HMRC) and may therefore result in a tax liability.
It is therefore recommending that HM Treasury (HMT) review and amend the legislation concerning approved charitable investments and loans, to reflect the definition of social investment and the new statutory power to make social investments.
There is also a recommendation that HMT introduce a procedure by which charities can obtain prior clearance from HMRC on the tax treatment of a proposed social investment.
The proposals, which follow a consultation in early summer, will now be considered by the government.
However, the Law Commission said it would also like to review the circumstances in which the restrictions on permanent endowment can be lifted and the procedures that must be followed.
It will discuss with the government the inclusion of this issue within its terms of reference for the project.