Investments by charities

Summary

Although many charities will use funds raised by them or donated to them straight away, for the purpose of their charity, a number will have funds that are not required immediately. And with over 185,000 registered charities in the UK, a number will be looking for guidance on where to invest those funds. In this article, we look at the factors that should be considered when making charitable investment.

Facts and analysis

Although small associations and groups can have charitable status, those that have funds available for investment, rather than being used for their charitable purpose immediately, are likely to be either Charitable Trusts or Companies. Trusts will be governed by the rules contained within the Trust Deed, whereas a Company would have it own Articles of Association

So what can a Charity invest in?

With a Charitable Trust, specific powers of investment would normally be contained within the Trust Deed. Additionally, in England and Wales, the trustees will be governed by the Trustee Act 2000, which provides wide investment powers, unless, of course, the Trust Deed itself restricts those powers.

Any investment will be made in the name of the trustees (as Trustees of the Charitable Trust). And all the Trustees will be required to apply for the investment, unless special arrangements have been made to delegate their investment powers (if permitted by the Trust Deed) or a nominee has been appointed.

For a Charitable Company, their powers will be contained in their Articles, with the investment being made in the name of the Company.

So what about using Investment Bonds

The charity may have the power to invest into an investment bond, but there are other issues to consider

For a Charitable Company, their powers will be contained in their Articles, with the investment being made in the name of the Company.

As an investment bond is a life insurance contract, strictly speaking the charity should have an insurable interest in the life insured under the bond (lives insured could be the trustees/directors). However, many life offices will accept this class of business without regard for insurable interest.

The question of tax efficiency is also important to consider. Charities are of course exempt from tax on much of their income and gains. However this general exemption does not always extend to gains under life policies.

Also, this exemption may be restricted where the charity incurs non-charitable expenditure. An example of this is where the charity invests into an investment bond. As this would be non-charitable expenditure, the charity would lose its tax exemption on an equivalent amount of their relievable income and gains. Thus the charity may find that some of its income and gains are subject to tax.

A charity should therefore be careful when incurring non-charitable expenditure; otherwise it may end up paying tax.

Policies held by charitable trusts

Chargeable gains on investment bonds held by Trustees are assessed on the charitable trustees, but at basic rate rather than the usual rate applicable to trusts (20% tax on the first £1,000 of trust income and 45% on any excess).

In the case of gains under UK life policies, the attaching tax credit would satisfy the trustees' liability, and there would be no further tax to pay. In the case of an offshore policy gain, the trustees would pay tax at basic rate.

Policies held by charitable companies

Companies are not subject to the insurance policy chargeable event rules, but are assessed to corporation tax under the ‘loan relationship’ rules. However, provided the proceeds are used for charitable purposes, a charity is exempt from tax on non-trading income in respect of loan relationships, under Sect. 486 Corporation Tax Act 2010

HMRC Guidance on the treatment of life assurance policies held by charities can be found at www.hmrc.gov.uk/charities/guidance-notes/annex6/annex_vi.htm

Apart from the above, if a charity invests in a UK bond it will not be able to recover the tax suffered within the life office funds. Indeed, withholding tax may also be suffered within the funds of an offshore life office and the charity would be unable to recover that.

So what about using a Collective Investment

Where the proceeds are used for charitable purposes, a charity is exempt from tax on gains made on investments in OEICS or Unit Trust. So there is no liability to capital gains or income tax.

Other general information about charities can be found at;

Charity Commission
www.charity-commission.gov.uk

Office of the Scottish Charity Regulator
www.oscr.org.uk

Charity Commission for Northern Ireland
www.charitycommissionni.org.uk

HM Revenue & Customs
www.hmrc.gov.uk/charities/tax/basics.htm

Next steps

From a tax perspective, a charity might be well advised not to invest in single premium investment bonds.

Indeed, guidance provided on charitable investment by the Charity Commissions on their website, states that ‘it seems unlikely that the making of this form of investment (life assurance) would be compatible with the proper discharge of their duties’. Thus, the use of collective investments is often considered to be more suitable

However, there may of course be factors other than tax that should be borne in mind, such as the availability of investment opportunities e.g. with profits or guaranteed funds.

The above tends to suggest that, broadly, investment bonds are less attractive than collectives for investments by charities.

Important information

The information contained in this article has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 6 April 2020. It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice.