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1. Allocating the unapplied total return |
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1.1 Allocating the unapplied total return
1.2 Allocating part of the unapplied total return to the trust for application (income)
1.3 The balance of the unapplied total return |
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1.1 Allocating the unapplied total return |
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Trustees will need to establish a rational policy to periodically determine what part of the unapplied total return is, from time to time, to be allocated to the trust for application(income) and, at the same time, give consideration to the amount of total return that will remain unapplied after the allocation to the trust for application (income). Trustees will need to consider these two areas simultaneously, as they are two parts of a single process. |
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1.2 Allocating part of the unapplied total return to the trust for application (income) |
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Trustees may allocate part of the unapplied total return to the trust for application (income) at any time. However on each occasion the allocation must be compatible with the discharge of the duty to be even-handed in their treatment of present and future beneficiaries. |
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Each time trustees come to use the power to allocate part of the unapplied total return to the trust for application (income) they must consider the total unapplied return available to them, rather than the charity’s investment return received in the year the allocation is to be made. The nature of a charity’s unapplied total return is discussed in more detail at OG 83 C3. If trustees only consider the investment return for the financial year in which an allocation to the trust for application (income) is to be made, it follows that they will have no funds at all to apply in a financial year when the investment return is negative. |
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The existence of a negative investment return in a particular financial year does not automatically prevent trustees from allocating any funds to the trust for application (income) in that year. What is important is that the unapplied total return is positive. An example of what might happen in a year when a charity’s investment return is negative is set out in OG 83 C4. In deciding the part of the unapplied total return which is to be allocated to the trust for application (income) trustees must take account of such factors as: |
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- fluctuations in the value of investment assets from year to year and the effect of any anticipated inflationary increase in the cost of providing the charity’s services and grants;
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- changes in the charity’s service provision.
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Trustees will need to consider past patterns of expenditure on the objects of the charity and the anticipated demand for the charity's support. For example, the trustees of a charity which exists for the benefit of people injured in a specific conflict can fairly expect that demands for the charity’s support will dwindle over time and eventually reduce to nil. They may therefore consider that they can allocate a relatively high part of their unapplied total return to the trust for application (income). |
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On the other hand, the trustees of a charity which exists for the welfare of elderly people can reasonably anticipate increasing demand for its services. Such a charity may therefore be more cautious about the proportion of its unapplied total return which should be allocated to the trust for application (income). |
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How much these and other factors will affect a charity will depend on the type of activity in which it is engaged. The total return approach is not just about spending resources which under the standard rules would be part of capital growth. It can also be about retaining resources (which under the standard rules would be income) for the protection of the interests of future beneficiaries. The particular circumstances of a charity will be relevant in the trustees’ considerations of its spend/retain policy. |
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The amount to be allocated to the trust for application (income) should not prejudice the ability of the charity to meet the present and future needs which are set out by its trusts. |
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1.3 The balance of the unapplied total return |
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Trustees must be able to justify the balance of funds remaining as unapplied total return at any time (ie after the allocation to the trust for application (income)). The justification should be based on the need to ensure that the charity will be able to carry out its purposes effectively in the future, even if there is a reduction in the unapplied total return caused by a fall in the value of the charity's investment assets. |
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Trustees who do not have a policy for determining how the unapplied total return should be treated, or who do not act in accordance with that policy, will expose themselves to the sort of criticism levelled against the trustees of charities applying the standard rules which are maintaining excessive income reserves. |
