EQUITY AND TRUSTS

A charity's purposes are its objects or aims which are usually set out in its governing document. At present there is no statutory definition of charity and the legal concept has been developed by the courts over several centuries. The current law is based on the preamble to the Charitable Uses Act 1601. 

The latter act does not contain a definition of charity but instead a list of the purposes considered charitable at that time. New purposes are considered to be charitable if they are analogous to one of the purposes listed in the preamble or to a purpose already considered charitable by analogy with it.

In the case of Income Tax Special Purpose Commissioners v Pemsel, Lord McNaghten grouped charitable purposes into four divisions:

 a) The relief of poverty;

It has been held by the courts that "poverty" does not mean utter destitution. It simply means a need of some sort, either for a home, or for the means to provide for some necessity.

 b) The advancement of religion;

With respect to the advancement of religion, there is no distinction in case law between one religion and another or one sect and another, so the advancement of any religious doctrine could be considered charitable.

The advancement of religion simply means the promotion of spiritual teaching in a wide sense. In the case of Centrepoint Community Growth Trust v CIR ,  the court found that the trust, which had as one of its purposes the advancement of the spiritual education and humanitarian teaching of Herbert Thomas Potter, was charitable as being a trust established for the advancement of religion.

 c) The advancement of education;

The courts have interpreted the category of advancement of education liberally. It has been said that education is not restricted to the narrow sense of schools and universities, and includes increasing and promoting the appreciation of arts and culture.

 d) Other purposes beneficial to the public.

The fourth category of the Pemsel classification has the greatest variety of activities and purposes that have been considered charitable. It was held by the majority of the New Zealand Court of Appeal in CIR v Medical Council of NZ that the Medical Council, which is a statutory body established, among other things, to maintain a formal system of registration of medical practitioners, was a charitable body.

The court held that the purpose of the Medical Council was the protection of the public by ensuring that only those persons properly qualified could practise medicine.

The main advantages of being a charity are:

• do not normally have to pay income/corporation tax (in the case of some types of income), capital gains tax, stamp duty, and gifts to charities are free of inheritance tax;
• pay no more than 20% of normal business rates on the buildings which they use and occupy to further their charitable purposes;
• can get special VAT treatment in some circumstances;
• are often able to raise funds from the public, grant-making trusts and local government more easily than non-charitable bodies;
• can formally represent and help to meet the needs of the community;
• are able to give the public the assurance that they are being monitored and advised by The Charities Commission.

A comparison between ‘public’ and ‘private’ trusts:

The primary difference is that a charitable trust aims to benefit society at large whereas a private trust is designed to benefit specified persons or groups of persons, or for purposes which the law does not recognise as charitable.

The difficulty in distinguishing between a charitable and a private trust can be particularly acute in the context of a trust for the settlor’s poor relations.

Moreover, whereas private trusts are enforced by the beneficiaries, charitable trusts are enforced by the Attorney-General on behalf of the Crown.

In addition, whereas certainty of objects is an essential requirement for a private trust, it is not necessary for a charitable trust; provided the purposes of a trust are wholly and exclusively charitable and the public benefit element is satisfied.

If the objects of a private trust fail, the property (in the absence of any express provision) will usually go on a resulting trust for the settlor ore the settlor’s estate. By contrast, if the objects of a charitable trust fail, the property can sometimes be saved for charity by the application of the cy-pres scheme; if the failure occurs before the property has vested in trust for the charity, general charitable intention must be shown by the settlor

At this point it may be also mentioned briefly that charitable trusts enjoy certain important fiscal exemptions and relief as compare with private trusts; these include limited exemptions from income tax, capital gains tax and inheritance tax. They also enjoy relief from business rates.

Under Charities Bill 2004:

The Charities Bill is based on the recommendations of the Cabinet Office’s Strategy Unit Report, Private Action, Public Benefit (2002), and in the report contained in the Home Office Report, Charities and Not-for-Profits: A Modern Legal Framework (2003). According to that reports, it is clear that the impact of the anticipated legislation upon the meaning of charity would be double; there is to be a statutory list of charitable purposes, and a tightening of the public benefit requirement.

New statutory definition of charity: Charity would have a new legal definition and charitable status would be subjected to a two-stage test. To be considered charitable, an organisation would need to demonstrate that its purposes, as set out in its constitution, fell within one or more of those in the new list of 12 charitable purposes, and also that it was established for the public benefit.

The listed charitable purposes are:

• the prevention and relief of poverty;
• the advancement of education;
• the advancement of religion;
• the advancement of health (including the prevention and relief of sickness, disease or of human suffering);

• social and community advancement (including the care, support and protection of the aged, people with a disability, children and young people);
• the advancement of science, culture, arts and heritage;
• the advancement of amateur sport;
• the promotion of human rights, conflict resolution and reconciliation;
• the advancement of environmental protection and improvement;
• the promotion of animal welfare;
• the provision of social housing; and
• other purposes beneficial to the community.

These categories are intended to reflect more accurately than the Pemsel heads the variety of charitable purposes of importance now days. Moreover, the above categories would include all the present areas of charity, widened in some cases, for example, the prevention as well as the relief of poverty. They would also widen the scope of what might be considered charitable.

In addition, public benefit would have to be shown under each of the above categories, instead, as at present, of only having to be proved under the final head of ‘other purposes beneficial to the community’. According to the latter a number of problems may arise.

First, the phrase ‘public benefit’ is used in different senses in charity law, since it can refer both to the purpose itself, for example, the advancement of education, and to the class to the persons to benefit. If the Strategy Unit Report is referring to the first sense, then it is not clear that there is any presumption of public benefit for purposes that it is sought to classify as charitable under the current second head. In the case of Re Pinion, a proposed museum of a ‘mass of junk’ failed to identified as charitable for the advancement of education, as did a proposed trust for the development of a phonetic alphabet in Re Shaw. At this point it is essential to note that in neither from the above two cases was there any presumption of public benefit.

Secondly, if the presumption is reversed, the effect will be that a number of existing bodies that enjoy charitable status would lose it, such as those charities for the advancement of the religion whose public benefit depends solely on the presumption of public benefit (Thornton v Howe).

Thirdly, whether a trust is charitable under English law currently turns on whether its purposes are wholly and exclusively charitable, not upon how the trustees in fact perform those purposes. The Strategy Unit’s proposals might therefore suggest that in future this isolating line is to be blurred. Generally, it is no clear how the independent schools are to meet the public benefit requirement. According to the latter, it could be said that the Strategy Unit Report is using the concept of ‘public benefit’ in a rather broader way than under the existing case law.

In addition, many universities are exempt charities, which means that they are not subject to the jurisdiction of the Charity Commissioners and do not, for example, have a registered charity number. 

However even exempt charities have to abide by the rules relating to charitable activities, and the advantages of charitable status, especially the tax advantages, may be jeopardised if the charity's resources are applied for non-charitable purposes.

Furthermore, as it was stated above, in UK most universities are charities, and most of them have 'exempt status', although that some are registered with the Charity Commission. Exempt status means that some classes of charity (including educational institutions) do not currently have to register with the Charity Commission. However, they do have to comply with Charity Law.

The Cabinet Office Strategy Report in 2001, Private Action, Public Benefit, recommended that 'exempt' charities should be more accountable for the benefits they receive from charitable status. In particular, under the Charities Bill, exempt charities will have their charitable status monitored by their 'principal regulator', and this is happened because it is intended to prevent the duplication of regulation and make use of current regulatory mechanisms.

The advancement of education lies at the very heart of UK universities; teaching, research and knowledge transfer have wide social and economic benefits.

Through their widening participation universities provide opportunities to individuals from across society and institutions to take part in a wide range of widening participation activities and following the passage of the Higher Education Act 2004 they will be able to provide significantly more financial assistance to students from lower socio-economic groups. Universities even provide sporting centres and cultural facilities such as museums. Higher education for its own sake also has benefits; it produces individuals able to analyse and make their own judgements.

Finally, some institutions have expressed concern about whether research and knowledge transfer would be included as charitable activities with a public benefit.

Capital and Income in Trusts: Classification and Apportionment:

Consultation Paper No175

The problem: that concerns charities at this point is the distinction between income and capital. Particularly, many charitable trusts have permanent endowments but they do not produce sufficient income to further their current charitable purposes.

Despite the unrestricted power of investment conferred by the Trustee Act 2000 the trustees of a charitable trust with permanent endowment are unable to take advantage of the investment possibilities open to them and they are not entitled to convert that capital into income in order to carry out the charity’s purposes.

Permanent endowments have become more inconvenient because of the inflationary pressures and low interest rates. The latter has a result for a lot of organizations, to capitalise rather that distribute their profits and in many circumstances are unavailable to continue the charity’s purposes.

According to section 75 of the Charities Act 1993, would allow more charities to fall within the requirements that enable ‘small charities’ to distribute permanent endowment.

As far as larger charities are concerned, section 75A of the 1993 Act would allow charity trustees to distribute permanent endowment as if it were income, where this would allow the purposes of the charity to be carried out more effectively.

 In addition, charity trustees should have a general statutory power to invest on a total return basis. The total return approach does not mean that trustees are given unrestricted powers to spend the capital, but it does allow them to invest in a way that generates the best overall return regardless of whether that is income or capital. This allows flexibility in distributing permanent endowments for the charity.

Trustees who exercised this power would be required to report the fact and submit the charity’s accounts to the Charity Commission each year.

The above applies only to those assets which are held on ‘trust for investment (capital)’. This means assets which cannot be directly applied or spent for the purposes of the charity but which must be invested to produce a return or, in other words permanently endowed charities holding investment assets.

The trustees are free to decide whether to apply to the Charity Commission to adopt the total return approach to investment. The Charity Commission will then decide whether to allow the charity the power to allocate investment returns between funds to meet expenditure referred to as "trust for application (income)" and funds for reinvestment or "trust for investment (capital)". In making any allocation of funds to expenditure the full extent of the previously unapplied investment return and not just the annual return has to taken into consideration.

Conclusion:

According to all the above, it is clear that the UK government intending to modernize charities and generally the whole concept surround them.

The legislative definition of a charity will closely follow the definition that has been determined by over four centuries of common law, but will provide greater clarity and transparency for charities.

Charities will continue to be able to have objects encompassing more than one purpose, and charities such as grant giving trusts would continue to be able to have 'general charitable purposes' objects to give them the maximum flexibility in the giving of grants.

Furthermore, it is desirable to encourage, rather than restrict, charities' advocacy and campaigning role since a lot of them include high levels of public trust and confidence than politicians or established political institutions have, and are therefore well placed to offer alternative ways of engaging with the public policy debate and the processes of democracy.

APOSTOLOS TSINGLIFIS

3rd Year Law student

Bibliography:

• briefcase on Equity & Trusts: Gary Watt

• Textbook on Trusts: Paul Todd & Sarah Lowrie

• Q & A, Equity and Trusts: 4th Edition

• Cavendish Lawcards, Trusts Law: 4th Edition

• Other sources have been taken from the Internet.

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