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UK Charity Commission consults on new investing regulations

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  • UK Charity Commission consults on new investing regulations

UK – The UK Charity Commission has published draft investment regulations applying to permanently endowed trusts and is seeking comment from the sector.

The regulations follow the enactment of the Trusts (Capital and Income) Bill in January.

The Act is intended to come into force later this year, once the regulations have been agreed.

The new law makes it easier for the trustees of charities with permanent endowment to spend investment income, by adopting a total return approach to investment within a framework determined by the Charity Commission.

At present, endowed charities have to allocate any increases in valuations to capital and can only spend this money by applying to the Charity Commission for an Order.

The new law will enable them simply to pass a resolution that allows them to invest on a total-return basis, giving them the ability to spend this income as they wish, in order to best further their charity's aims.

The proposed new power allows trustees to allocate investment returns – including those that would usually be treated as income and those usually treated as capital – to the charity's unapplied total return.

Unapplied total return may then be allocated between capital and income as the trustees consider appropriate.

There would be no limit on the amount of unapplied total return that can be allocated to income and spent on a charity's aims.

Trustees of endowed charities would also be able to allocate a limited amount of their capital – the suggested maximum is 10% – to the trust for application (income).

But they would have to put in place reasonable arrangements for repayment.

The draft regulations set out how charities should adopt their own resolution for using a total return approach, while ensuring appropriate safeguards are in place.

In addition, they aim to preserve the principle of furthering the aims of the charity now and for the future, as well as respecting the right of a donor and settlor to establish a permanently endowed trust.

They also make provision for a trust to revoke a resolution adopting a total-return approach to investment, and to return to the standard rules for investing permanent endowment.

The regulations also require the Charity Commission to review their effect after five years.

Laura Soley, a partner in the charity and social enterprise at Bates Wells & Braithwaite, said: "A total-return approach allows trustees to invest with a view to maximising overall investment returns, whether income or capital gain.

"It allows them to decide, each year, how much of that overall return to spend.

"This gives trustees much more flexibility, both in terms of investment strategy and the funds that are available for expenditure on the charity's work."

The consultation includes asking whether there should be circumstances under which charities must still seek permission to use a total-return approach to investment.

It also asks whether there should be a limit on the amount of unapplied total return that can be allocated to income and spent on a charity's aims (the draft regulations do not contain a limit), and whether a cap of 10% is reasonable on the proportion of capital that could be used as income.

The consultation closes on 20 June.

The regulations are intended to be ready for use from October 2013.

The regulations can be downloaded here.

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