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| The law |
Refer to a lawyer |
Refer to an accountant |
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1. Replacing expenditure from a charity's investment fund |
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Trustees may wish to spend part of a charity's investment fund. Our authority will be required for such expenditure. |
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The factors which will determine whether such expenditure should be replaced are the same as those that apply in the case of a charity that allocates its investment return in accordance with the standard rules. However, the mechanics of the replacement will be different in the case of a charity which has adopted the total return approach. |
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A charity which allocates its investment return in accordance with the standard rules may be given authority to spend a part of its permanent endowment on terms of replacement out of future income. The capital expended will normally be replaced on a pound-for-pound basis over a specified period. The objective is to make good the amount expended from the permanent endowment thereby re-establishing a fair balance in the treatment of present and future beneficiaries. |
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Where a charity which allocates its investment return on a total return basis is given authority to spend a part of its investment fund its trustees must also make good the amount expended from its investment fund. However, in this case it will not be practical to require the replacement to be carried out in a prescriptive way when the allocation of investment returns is carried out in a flexible way under the total return approach to investment. |
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Trustees will need to judge, (with the benefit of professional advice), how best to make good the loss to the real value (ie the purchasing power) of the investment fund. They will need to take account of this objective when deciding the amount of the unapplied total return to be allocated to the trust for application (income), as required by the duty of even-handedness. |
 
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2. How we will authorise replacement |
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Where it is considered that the funds expended should be replaced, the model Order at OG 83 C6 should be used to authorise the expenditure of part of the investment fund and to direct the replacement of the part expended in the way explained in section 1 above. |
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The number of years over which the expended part of the investment fund should be replaced will need to be determined in the same way as in the case of a charity which allocates its investment return in accordance with the standard rules. This will normally be related to the expected "life" of the asset being provided or improved by the expenditure. |
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The part of the investment fund to be replaced is that part from which the resources expended were taken. This may be the part of the investment fund which represents the unapplied total return, that part which represents the value of the gifts to the charity held on trust for investment, or a combination of the two. A specific provision in the recoupment Order is not necessary to allow this. This should be explained to the trustees in any letter accompanying the recoupment Order made in these circumstances. |
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3. Existing Orders for the replacement of a charity's investment fund |
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Some charities will have Orders for the replacement of expended capital in operation at the time the trustees first adopt a total return approach to investment. In these circumstances, the trustees can either work out the Order according to its terms or they can ask us for a fresh Order to replace this. |
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If they choose to work out the existing Order, the capital replacement account(s) will have to be serviced out of funds subject to the trust for application (income). It will not be appropriate for trustees to inflate the sums allocated to the trust for application (income) to enable this to happen. To do so would be a breach of the duty of even-handedness. |
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If trustees choose to ask us for a fresh Order, the total outstanding balance of the amount(s) which is/are directed by the Order(s) to be replaced should be regarded as the "expenditure", for clause 1 of the fresh Order. The Order will operate in the same way as an Order authorising "new" expenditure by a charity adopting the total return approach to investment. |
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Where trustees are replacing expenditure that was incurred before the adoption of a total return approach it may be difficult to identify the part of the investment fund from which the resources were originally taken – see the last paragraph of section 2 above - and the part which should therefore be re-credited. Trustees should seek advice from the person who provides the charity with investment/actuarial advice, as required in the Order authorising trustees to adopt a total return approach. |
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