Waking the potential of long dormant funds

The question of charitable status for schools has been in the news lately. Here, Gavin McEwan, partner and head of charity law at Turcan Connell explains how to make the most of available funds

In these days of low interest rates, it is important that charities review the funds they hold from time to time. Often, a charity’s funds will include donations and legacies received many years ago but which are now largely or entirely dormant.

The impact of low or no interest, combined with increasing inflation, means old funds held in cash will now suffer a real terms erosion in value.

With this in mind, it is good practice for charities to review carefully any old funds to see if they can be put to better use.

Charities often speak about “endowments” and “restricted funds” when referring to old or dormant donations and legacies and the impression which charity trustees have is that these old funds cannot be spent but this is not always the case.

Sometimes a review of the conditions attaching to old endowments can show them to be more flexible than originally thought.

The first point to check is whether funds are properly classified as “income expenditure only” funds.

Often charities are sitting on cash in the bank which they have long understood to be capital endowments, only to find later that, on a careful reading of the legal paperwork, both income and capital could be used.

That alone can free up funds for charitable purposes.

The second point to check is whether funds which are subject to restrictions on how they can be used could be altered in some way.

Where a donor has imposed a restriction on a donation, that individual has the ability to amend the restriction, provided he or she is still alive and has the capacity to make the desired amendment.

Where a donor has died, or where a restriction is imposed under the terms of a will, different rules apply.

Restricted funds which cannot be amended because the donor is no longer alive are not necessarily stuck with their original conditions forever.

Provided charities can demonstrate that the funds could be put to more effective use, an application to the Office of the Scottish Charity Regulator (OSCR) can result in a relaxation or removal of conditions, allowing charities a chance to use formerly restricted funds for their charitable aims and objectives.

Occasionally it turns out that a condition about the use of an old gift or legacy was not actually imposed by the donor in the first place but was tagged on to the gift by the charity trustees themselves.

In such a case, the charity trustees can remove that self-imposed restriction.

With any of these examples, the trickiest thing can sometimes be a lack of paperwork but with a bit of support from advisers and from OSCR, even that problem can be dealt with in order to free up old and dormant funds for charitable works.

Any charity sitting on apparently dormant endowment funds should be taking practical steps to review them – those old restricted funds may not be as restricted as you think.

Gavin McEwan has advice for charities.