New power of social investment for charities

Much of the focus on the Act has been on curbing the excesses of charity fundraising, but on the more positive side, this new Act will give charities the power to enter into “social investments”. Social investments are transactions in which a charity seeks to achieve both its charitable purposes and a financial benefit, as opposed to only trying to get best value by maximising the income from its assets. Social investment is of particular importance in the charitable sector as it allows charities to pursue their objectives in ways that were previously unavailable and allows for limited funds to be put to use in a more efficient way.

Though the Act received Royal Assent on 16 March 2016, the majority of the Act (including the power to enter into social investments) is not yet in force.

So how will charities use this new power?

Section 15 of the Act provides that before exercising this power, charity trustees must:

a) consider whether in all the circumstances any advice about the proposed social investment ought to be obtained. If advice is considered necessary, the advice must be obtained and considered; and

b) satisfy themselves that it is in the interests of the charity to make the social investment, having regard to the benefit they expect it to achieve for the charity (by directly furthering the charity’s purposes and achieving a financial return).

If both of these requirements are satisfied, the charity may then enter into a social investment.

Charity trustees will also be under an obligation to review a charity’s social investments from time to time (although the Act does not specify the timeframe it considers necessary).

Examples of Social Investments

The Law Commission consultation paper on “Social Investment by Charities” gives the following examples of the types of action which would be permitted as social investments:-

1. A homelessness charity purchases empty properties to renovate and let-out at a low rent to homeless people. This would qualify as a social investment, as the charity achieves its purposes in providing housing for the homeless, and obtains a financial return through the rental income and any increase in the value of the property.

2. A charity established for the relief of unemployment that grants leases of its properties at a low rent to start-up businesses. This would qualify as a social investment because the charity achieves its objectives by securing new jobs and obtains a financial return from the rental income.

Both of these examples would also fall within the exemption on the requirement for charities to obtain valuation advice before disposal under section 117(3) of the Charities Act 2011.

What the Act does not do

With the extension of the “right to buy” coming into force to include Housing Associations, it was hoped that this Act would contain a specific exclusion for social housing charities. However, this amendment was defeated in the House of Commons and did not make it into the final Act.

Finally the Act does not deal with “functional” permanent endowments, such as when a property is gifted to a charity for a specific purpose. This is because with this type of permanent endowment the distinction between capital and income rarely applies as there is often no income. For example recreational grounds, museums and historic buildings.

If you would like further advice on the impact of the Charities (Protection & Social Investment) Act 2016 please get in contact with Anna Zatouroff or a member of our Charities Group Team.