The Regulator for Charities in England and Wales
(Version December 2004)
1. Many charities have surplus funds not needed to fund their immediate charitable activities; often the trustees invest some or all of this surplus in order to generate extra income to fund future activities. This guidance sets out to explain briefly the powers and duties of charity trustees when investing charitable funds. It is intended to be an introduction to the subject for trustees and members of the general public who have little or no experience in this area.
2. While the general guidance given here applies to most charities, there are a number of ways in which the situation differs in detail for the directors of charitable companies. For more information relating to these charities please see the detailed guidance.
3. The basic principle governing trustees' decisions about investing their charity's funds is that they must take a prudent approach.
4. When investing charitable funds (especially where those represent permanent endowment), trustees must seek to strike the right balance for their particular charity between the two objectives of:
5. In order to discharge the duty to adopt a prudent approach to the investment of the charity's funds, trustees must:
6. We also strongly recommend that, where the size of the funds to be invested justifies this, trustees should decide on a formal investment policy for the charity. This will, of course, vary in the level of detail and complexity depending on the size of the charity, and on whether the function of investment has been delegated(see paragraphs 30-31).
7. Conceptions of what constitutes "investment" vary - in this context it needs to be distinguished from other forms of income generation, such as trading and gambling. The definition of "investment" used in trust law, and more information on what does and does not constitute investment, are in the detailed guidance on our website. However, for most trustees, particularly of smaller charities, the examples of what are and are not investments in paragraphs 9-10 below should be sufficient as a guide.
8. In this guidance:
The Charities Act means the Charities Act 1993. The Trustee Act means the Trustee Act 2000.
Charitable companies are companies formed and registered under the Companies Act 1985 or to which the provisions of that Act apply and which are established for exclusively charitable purposes.
Governing document means any document setting out the charity's purposes and, usually, how it is to be administered. It may be a trust deed, constitution, memorandum and articles of association, will, conveyance, Royal Charter, or Charity Commission or Court Scheme. The expression "trust instrument" is used in the Trustee Act; in the vast majority of cases its meaning is the same.
Investment manager means an individual or a corporate body appointed by a charity or its trustees to make investment decisions on behalf of the charity. The investment manager will make those decisions within the framework of an investment policy which the trustees have formulated.
Land includes any buildings on the land.
Permanent endowment is property of the charity (including land, cash or investments) which the trustees may not spend as if it were income. It must be held permanently, sometimes to be used in furthering the charity's purposes, sometimes to produce an income for the charity. The trustees cannot normally spend permanent endowment without our authority.
Trustees means charity trustees. Charity trustees are the individuals or corporate bodies who, under the charity's governing document, are responsible for the general control and management of the administration of the charity. In the charity's governing document they may be called trustees, managing trustees, committee members, governors, council members or directors, or they may be referred to by some other title. Must or need to are used to refer to actions that trustees, or their agents or employees, are required to take, by law or under the charity's governing document.
Where we use terms such as the trustees should or we suggest, recommend or advise we are referring to actions which the trustees, their agents or employees could take and which we consider to be good practice, but which are not legal requirements.
9. The term "investment" is not defined in statute. Instead the courts have interpreted the phrase. Whilst not exhaustive, some common examples of investments include:
10. Some examples of what do not constitute investments are:
11. Under the Trustee Act, most trustees will have a very wide power of investment. In practice this means that most trustees are able to invest in almost anything regarded under trust law as an investment (see above for examples of what the Commission considers falls within the trust law definition). There are some restrictions on investment in land.
12. The following paragraphs explain the circumstances in which trustees do not have the power of investment which the Trustee Act confers. They also explain the conditions which apply when using powers of investment.
13. These general powers of investment are not available where:
14. Where the Trustee Act powers are not available, trustees must rely on any powers within their governing document when making investments.
15. When managing a charity's investments, trustees must act to certain standards as defined in the Trustee Act, whether they are using the investment powers in that Act or not:
16. The Trustee Act requires the objective consideration of the points mentioned above. The trustees of charitable companies have similar obligations, even though the Act does not apply to them expressly. All trustees must also take into account any relevant provisions in their charity's governing document.
17. Trustees of all charities with permanent endowment have a duty to be even-handed between the interests of present and future beneficiaries of the charity. In practice this means that they must consider whether an investment provides a suitable balance between providing income for current needs and preserving or increasing the value of the investments so that the charity can operate effectively in future.
18. Some other duties of trustees with respect to investments are as follows:
19. Trustees are not liable to make good the charity's loss simply because an investment made by them is unsuccessful. However, trustees may be liable if, in making or retaining the unsuccessful investment, they have acted outside the scope of their powers, or have failed to discharge the duties referred to above.
20. Charities which are corporate bodies (of which the most common are charitable companies) have a legal identity and can hold investments in their own name.
21. Unincorporated charities, such as trusts and associations, do not, however, have their own legal identity, and therefore the charity trustees will have to hold the investments in their own names. It will usually be more convenient for them to appoint one or more individuals or a corporate body to hold the investments on behalf of the charity. A person who does this is a "nominee". In practice this term tends to be used where the nominee is a corporate body. Nominees are often called holding trustees where they are one or more individuals, who are often selected from among the charity trustees.
22. A custodian is someone who, on behalf of the trustees as a whole, looks after the documents or other evidence of the title to the charity's property - for example share and land certificates. Often the two roles of nominee and custodian are combined. A custodian may also provide other investment-related services, such as handling claims for repayments of tax due in respect of investment income.
23. A custodian trustee combines the functions of a nominee and custodian, but someone who is both nominee and custodian is not necessarily a custodian trustee. The identity, and powers and duties, of a custodian trustee are prescribed by statute; for further information about custodian trustees please refer to Operational Guidance OG39, written primarily for our staff.
24. The Trustee Act enables charity trustees to appoint, in writing, certain types of person to act as their nominee and the same or a different person to act as their custodian. It is up to the trustees to decide whether to make these appointments, and whether they relate to some or all of the charity's assets, including investments. This statutory power is in addition to any other powers to appoint a nominee or custodian or custodian trustee which the trustees have, either from statute or the charity's governing document.
25. Detailed information about the scope of powers to appoint nominees, custodians and custodian trustees, and the duties associated with the use of those powers, is given in our guidance Appointing Nominees and Custodians: Guidance under s.19(4) of the Trustee Act 2000 (CC42). This is also available in hard copy.
26. Many charity trustees will consider it best to place the management of the charity's investments in the hands of a specialist. There are two main ways of doing this:
27. For smaller charities the first option may well be a cost-effective way of achieving a professionally managed and balanced portfolio. But trustees must still fulfill the investment duties described in paragraphs 15-19 above and satisfy themselves of the suitability of any collective scheme as an investment vehicle for their charity.
28. Larger charities with significant funds may consider appointing an investment manager, which is unlikely to be cost-effective for smaller charities. This involves the trustees in a number of extra duties in appointing an investment manager, providing them with direction as to the charity's investment policies, and reviewing their performance.
29. The advantage of using an investment manager is, of course, that the manager can pursue an investment strategy which is tailor-made to the needs of the particular charity. But this advantage comes at a cost, both in terms of fees charged for the service, and in terms of the trustees having to discharge the extra responsibilities referred to above in their relationship with the investment manager.
30. We strongly recommend that charity trustees decide on an investment policy for their charity, record it clearly in writing, and keep it under regular review - if they have delegated their investment function to an investment manager these are legal requirements. Without an investment policy, trustees are likely to find it difficult to demonstrate that they are making good use of the charity's funds.
31. Any investment policy should, for example, address the following considerations:
32. The question of basing an investment policy on ethical considerations can be an important one for charities. The essentials are dealt with briefly here.
33. If trustees are to adopt an ethical investment policy, or follow one laid down in the charity's governing document, they need to keep in mind their duty to invest in a way that furthers the purpose of the charity. This will normally be achieved by seeking the maximum return from a set of investments which have been selected prudently. An ethical investment policy can be entirely consistent with this duty, but there can also be a risk that the exclusion from consideration, or preference, of certain investment classes or particular investments, may detract from the objective of obtaining the best direct financial returns from investment.
34. Trustees may well consider that the adoption of a particular ethical investment policy does not detract from the objective of obtaining the best direct financial return from investment. They must, of course, then be able to justify their position, through being able to show that they have, in following the policy, fully discharged the investment duties referred to above. Some trustees may, however, wish to adopt an ethical investment policy, even though it does or may detract from the objective of obtaining the best direct financial return. The circumstances in which they may do this are outlined in the following paragraph.
35. Trustees are able to adopt an ethical investment policy which will involve:
36. There may be some cases where the two previous statements do not apply, but the trustees wish to make investment decisions on moral grounds (this may include using positive or negative criteria, or a combination of both). In these cases, however, the trustees must be particularly clear that their decisions will not place the charity at risk of significant financial detriment due to under performance by the preferred investments or by the exclusion from consideration of forms of investment to which the trustees are opposed.
37. Trustees are unlikely to be criticised for adopting a particular policy if they have considered the correct issues, taken appropriate advice and reached a rational result.
38. Note that ethical investment is not the same as "social investment". Also known as "programme-related investment" ("PRI"), this is an entirely separate concept, and is not investment in the financial sense, as its primary aim is to carry out the objects of a charity. For more details please see the separate guidance on Charities and Social Investment .
39. Most investments are treated as "qualifying investments" by the Inland Revenue. However, the making of certain types of investment (mostly in categories which we would consider unsuitable for the majority of charities) may be treated as "non-qualifying investments". This can lead to a restriction of the charity's tax reliefs. Trustees making such investments will need to be able to satisfy the Inland Revenue that the investments are made for the financial benefit of the charity and not for the avoidance of tax, whether by the charity or by any other person.
40. Guidance on the tax implications of investment by charities can be found on the Inland Revenue website.