Charitable Trusts and Charitable Companies Limited by Guarantee

Philanthropic individuals and business owners are showing an increasing inclination to establish charities, either on death or during their life-time. Setting up your own charity enables you to advance your chosen cause in a tax-efficient environment and to leave a lasting legacy. Charitable trusts, unlike private trusts, are not subject to the rules against perpetuity and can, in effect, run indefinitely.

We can help you to decide on the appropriate charitable vehicle to suit your needs - this may be a charitable trust or a charitable company limited by guarantee. We can draft the governing documents and deal with registration at the Charity Commission (and, if required, at Companies House), where appropriate.

Alternatively, you may wish to make provision in your Will for the establishment of a charitable foundation in your name following your death. You can either dictate the terms of such a charity in your Will or, preferably, you can give your Executors guidance as to the charitable objects which you wish your charity to pursue and leave it to them to establish the charity in accordance with the prevailing legislation at the time of your death.

There is currently a choice of two vehicles to establish a charity in your life-time:

• A Charitable Trust
• A Charitable Company limited by guarantee

A Charitable Trust is run by the Trustees with their duties and powers deriving from the Trust Deed. Such a Trust is suitable where the dealings of the Trust are simple (eg. making grants to individuals or other charities) and there are a small number of people involved in the decision making process. Individual trustees are jointly and severally liable to the charity's creditors.

Where it is envisaged that the charity will be involved in more complex operations eg. owning property, staff employment contracts, construction contracts etc. the trustees may feel the need to be protected from unlimited personal liability. In such circumstances, the advisable route would be to establish the charity as a Company limited by guarantee. Interested individuals can join as members - each member giving their guarantee of, say, £10 but the directors (here the directors are the equivalent of the trustees) would have control of the running of the charity. Directors and members can be the same people.

A charitable company must be registered at Companies House prior to registration at the Charity Commission. A Charitable Company has dual reporting/accounting requirements to both the Charity Commission and to Companies House and must comply with both charity law and company law.

The Charities Act 2006 has introduced a new legal entity - a Charitable Incorporated Organisation (CIO). It is envisaged that a CIO, whilst offering the directors limited liability, will be regulated by the Charity Commission only. The Charity Commission are currently consulting on their proposals and it is envisaged that CIOs will be introduced later this year or early next year.

It is important to understand that registration at the Charity Commission merely confirms charitable status, it is not essential for achieving charitable status - this comes from the fact that the charity's objects are exclusively charitable. The Charity Commission require that charities with an annual income in excess of £5000 should be registered but small charities can benefit from the tax advantages of charitable status (such as Gift Aid) without being registered at the Charity Commission. We can assist small charities in obtaining a tax reference number from HMRC to enable donors to the charity to claim Gift Aid, thereby increasing the value of the donation.

Charitable Objects

As stated previously, in order to gain charitable status with the Charity Commission and with HMRC, the objects (the purposes or aims) of the charity must be exclusively charitable. Until very recently, the concept of 'charity' relied on case law developed since the Charitable Uses Act 1601. There were four recognised 'heads' of charitable purpose: Relief of Poverty; Advancement of Education; Advancement of Religion and Other Purposes Beneficial to the Community. The latter allowing for charity law to develop and to keep pace with changing social mores.

The Charities Act 2006 ('the Act') has now introduced a range of charitable purposes onto the statute. The act can be viewed in its entirety here.

There are thirteen charitable purposes defined in the Act:

1. The prevention or relief of poverty
2. The advancement of education
3. The advancement of religion
4. The advancement of health or the saving of lives
5. The advancement of citizenship or community development
6. The advancement of the arts, culture, heritage or science
7. The advancement of amateur sport
8. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
9. The advancement of environmental protection or improvement
10. The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
11. The advancement of animal welfare
12. The promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services
13. Any other purposes

The last category is the 'cover-all' category to enable the law to expand to reflect changing social needs and attitudes. Hence, Section 2(4) of the Act reads as follows:

"The purposes within this subsection (see subsection (2)(m)) are:

• any purposes not within paragraphs (a) to (l) of subsection (2) but recognised as charitable purposes under existing charity law or by virtue of section 1 of the Recreational Charities Act 1958 (c. 17);
• any purposes that may reasonably be regarded as analogous to, or within the spirit of, any purposes falling within any of those paragraphs or paragraph (a) above; and
• any purposes that may reasonably be regarded as analogous to, or within the spirit of, any purposes which have been recognised under charity law as falling within paragraph (b) above or this paragraph.

The Act introduced a new requirement for charities in England and Wales, namely, that a charitable purpose must be for the public benefit. This requirement became law in April 2008. The Act does not define public benefit. Essentially, those seeking to argue that a particular purpose is charitable must be able to demonstrate what benefits to the public arise from the charity carrying out its chosen purpose; those benefits must relate to the proposed purpose; the benefits must be balanced against any detriment or harm; the opportunity to benefit must not be restricted by the ability to pay and any private benefit obtained from the proposed purpose must be incidental. The Charity Commission has now published guidance on the concept of public benefit - available at http://www.charity-commission.gov.uk. Anyone who is contemplating establishing a charity would be well advised to consider the guidance carefully.

Call 0844 980 1429 for a consultation with a Trusts and Estate Planning Solicitor or Lawyer at Pannone LLP. We are available to take your call twenty four hours a day, seven days a week.