In what ways can a charity use its funds?

Charitable funds

Many people in England and Wales provide charities with funds, whether this is through individual donations given by themselves, donations through a fundraising event, or funds provided to the charity through a charitable trust or a will.

Funds given to charities can include money, but can also include property and assets of any sort provided to individual charities.

Often funds given to charities will be given for a specific purpose. In this case the funds must specifically be used for this purpose. The accounting records of the individual charity should therefore distinguish between the different types of funds which are provided to them and the terms by which they were given.

The funds provided to charities will usually fall into one of two categories:

  • restricted funds;
  • unrestricted funds.

Restricted funds

Restricted funds can be split into two categories:

  • restricted income funds;
  • endowment funds.

Restricted income funds

Restricted income funds are often created by charitable trusts, whereby the purposes are specified by that trust. The funds can only be used for the specific purposes for which they are given. The purpose will either be specified by the donor in a letter or in the terms of a public appeal running at the time of the donation.

If restricted income funds are used by a charity for any other purposes than those which were originally specified, this could amount to fraud or deception.

Endowment funds

Endowment funds can be split the two categories:

  • permanent endowment funds;
  • expendable endowment funds.

Permanent endowment funds are funds given to a charity to be held as capital. In this case, the donor has given no power to either the board of trustees for the charitable trust or the management company in charge of the trust to convert them to income.

The capital must therefore be retained for the charity. However, this does not stop the investment income derived from it being available for the general purposes of the charity.

The Charities Act enables charities to spend permanent endowment funds according to various safeguards and procedures which apply according to the size of the charity.

Smaller unincorporated charities which have available endowment funds valued at less than £10,000 and which have an annual income of less than £1,000 can spend permanent endowment funds through their trustees or management committees without the involvement of the Charity Commission or without having to advertise their intention to do so.

Permanent endowments can only be spent if the trustees agree it’s necessary to help their charity carry out its purposes more effectively, eg, if the charity needs money to set up a new project.

Larger charities which have a single purpose, endowment fund valued at more than £10,000 and an annual income of more than £1,000 can pass a resolution agreeing to spend a permanent endowment fund. However, the Charity Commission must approve the resolution before the money is spent.

Charities can use the commission’s online form to apply for consent. They will need to provide the Commission with details of:

  • the current market value of the endowment;
  • the charity’s income;
  • the meeting in which the trustees passed a resolution to spend the permanent endowment;
  • a copy of the resolution including the reasons for spending the permanent endowment.

Once this has been done, the Charity Commission will notify the trustees or the management company if it agrees with the resolution. This notification will be provided within three months of the resolution being filed.

Expendable endowment funds

Expendable endowment funds are given to a charity as capital but there is no restriction on them being converted into spendable income. The discretionary power of whether or not to do this will rest with the board of trustees or the management company in control of the charity.

The funds will remain as capital in nature until they are converted into income.

Unrestricted funds

Unrestricted funds can be split into the two following categories:

  • non-designated or general funds;
  • designated funds.

Non-designated or general funds

Non-designated or general funds are funds which are available to an individual charity for the general purposes of that charity. These funds will be spent in whichever way that the board of trustees or the management company in charge of the charity sees fit, in accordance with the stated objectives of the charity.

These funds are not earmarked in any way or for any specific purpose, meaning the trustees or the management company can set the priorities for the funds and how and when they are spent.

When a charity fundraising event occurs which does not have a specific purpose but simply aims to raise money for a certain charity, all funds raised will be regarded as non-designated or general.

Designated funds

Designated funds are also funds which are available for the general purposes of the charity, however, they have been chosen by the board of trustees of the management committee in charge of the charity to be used for a specific purpose.

A decision to designate certain funds for a specific purpose will be made at meetings by the board of trustees or the management committee of the charity.

The board of trustees or the management committee will have the power to change decisions regarding funds designated for specific purposes and designate them to other purposes or simply leave them as non-designated or general funds.