Councils and charity trustees

August 28, 2024

The Charity Commission has issued a warning to local authorities over the failure to comply with legal duties as charity trustees. Paul Hilsdon looks at the steps councils should take.

David Holdsworth, the recently appointed Chief Executive of the Charity Commission issued a regulatory alert to local authority CEOs on 8th August 2024 asking them to take action to ensure their organisation’s compliance with its duties when operating as a charity trustee.

He explained that the Commission is seeing a significant number of cases where local authorities have failed to comply with their legal duties and the Commission has had to take action following receipt of complaints from the public.

Failure to recognise their charitable assets leads to increased costs and management time spent resolving an issue that could have been avoided. As a consequence, new formal guidance for Local Authorities has been issued by the Charity Commission and this note summarises that guidance and identifies how local authorities can address the issues.

The most common areas of failure by local authorities noted by the Commission are:

not being aware that it is a trustee of a charity
unknowingly using charity property for its own local authority purposes
not identifying when there is a conflict of interest
not managing small funds, which become dormant
not keeping separate accounts for the charity
not submitting accounts or annual returns to the Charity Commission when they fall due

Identifying charitable assets

Authorities should review their Asset Register for both corporeal (e.g land/open spaces/civic buildings and cultural and historical structures) and incorporeal assets (e.g legacies, donations and prizes).

Check the basis upon which the asset became vested in the Authority. Review gifts of land and money and the deed, instrument or other governing document or circumstance vesting the asset in the Authority. Has a trust been established?

Check unregistered (and maybe very old) deeds and documents as well as the land registry title register but that may not be correct as it only reflects the quality of the registration application and may need rectifying.

Check the Charity Register and if not registered then check if the asset is held for charitable or non charitable purposes or for the authority’s statutory function. That is not always clear but this needs to be established.

Label the asset register accordingly and consider whether the trust/asset should be registered as a charity (income of over £5,000 per annum).

Identify the Trustees

This is likely to be clear from the Trust’s governing document and in the case of local authorities usually one of the following applies:

the local authority has a right under the governing document to appoint trustees or
the local authority itself is the trustee

Where the local authority is the trustee:

any council officer or member working on charity business is not a trustee and does not have the responsibilities or liabilities of a trustee as they are acting on behalf of the local authority
the local authority is the decision-maker
the local authority is liable for the decisions it makes as a trustee

Following recent local government reorganisations it may not be clear as to which authority is the trustee or has the right to appoint trustees but this needs to be established.

Sometimes, in a similar way to the Official Custodian of Charities, the local authority can be the holding trustee of a trust asset. If this is the case:

it holds the title to all property on behalf of the charity
it does not have the responsibilities of a charity trustee
it must act only on the directions of the trustees unless doing so would create a breach of trust

Managing the Trust

Ensure the Authority and all relevant officers and members are aware of their responsibilities as charity trustees or advisers.

Review whether the governing document is still fit for purpose or does it need to be amended?

Review the decision-making of the Authority as trustee to determine if it has been acting within the terms of the Trust and consider appropriate action if that is not the case.

As a charitable trustee:

ensure charity property is used for the charity’s purposes
ensure proper mechanisms are in place for making trustee decisions
ensure decisions they make are only in the charity’s best interests
identify and manage conflicts of interest, and obtain authority from the Charity Commission where it is needed
comply with accounting and reporting responsibilities
act with reasonable skill and care in exercising duties as trustee

The Authority can decide the mechanism for making decisions and exercising its functions as trustee and options include:

decision-making delegated to committees such as a committee of the local authority or a committee of the executive of the local authority
decision-making by full Council or at the cabinet level if there are multiple trusts or a trust is substantial or if conflicts of interest are likely to arise

Where decision-making by the full Council or at the cabinet level is concerned, an advisory committee can be set up to help the local authority make decisions but an advisory committee cannot make decisions.

Charity trustees must make decisions in a way that complies with their duties, including their duty to further their charity’s purposes and act only in the charity’s best interests.

The local authority should consult on significant decisions that are likely to affect beneficiaries.

Managing conflicts of interest

Local authorities will often face conflicts of interest because of the different roles they have.

Conflicts can arise in many forms including that of divided loyalty or potential for financial gain.

Decisions must be taken in the charity’s best interests and if a Charity Commission authority is required to enable a decision to be implemented then trustees will need to show how they have reached a particular conclusion.

Authorities should identify conflicts at an early stage and resolve them before decisions are made. They should set up a separate conflict of interest policy to guide how the local authority will make decisions when it is conflicted.

Potential solutions to conflict problems include appointing independent trustees or delegating to a sub-committee or appointing an advisory committee of non-councillors.

The policy should be appropriate to the types of charities of which the local authority is a trustee and how the local authority could be conflicted.

A local authority’s usual conflict of interest policy, which applies to its role as a statutory authority, does not apply to its role as a charity trustee.

Note that persons “connected with” the Authority or its members and officers may also cause conflicts of interest to arise.

Charitable funds cannot be used to discharge statutory functions but the local authority trustee can (subject to the terms of the trust and best interests of the Charity) be reimbursed for expenses of running the charity including maintenance and staff costs and including a fair and reasonable proportion of employee wages, administration fees etc.

Disposing of charity land

When selling, leasing or in other ways disposing of charity land, trustees must:

have the power to dispose
consider that disposing of the land is in the charity’s best interests
comply with the legal requirements on disposing of charity land as set out in the Charities Act 2022 which very largely came into full force and effect from 7th March 2024

Any money received from the disposal of a charity’s asset belongs to the Charity and should be used for its own charitable purposes.

An unincorporated trust of which the Authority or Officer/Member is trustee does not have a separate legal personality so documents should be signed /executed by the Trustee/Council as “Trustee of { Name of Trust} ”.

Land swap and renting charity land by Authorities

Local authorities as trustees can swap their own, corporate property with the charity’s land. The corporate property becomes charitable land but the decision must be in the charity’s best interests.
Where the charity’s land is “designated”, the local authority must consider how the purposes for which the land must be used may be affected.
Regardless of the nature of the land, as the local authority is the trustee, the Charity Commission authority is required
An authority may rent charity land but it must be in the charity’s best interest to do this and the authority as trustee must comply with the rules on disposing of charity land
Where the charity’s land is “designated”, it must be used for the purposes set out in its governing document. If it is not, this could be a breach of trust.

Managing small funds

A local authority may be a trustee of several separate small charitable funds such as school prize funds.

The Fund can be closed if it is in its best interests to do so.

If the fund can be fully spent (for example, it is not a permanent endowment), then it can be spent in line with the charity’s purposes. This effectively closes it.

If the fund is a registered charity, the Charity Commission must be informed that it has closed.

Permanent endowment is an asset that must be kept and not spent and special rules apply.

Changing the purposes of the funds

If trustees cannot further the charity’s purposes effectively or further them at all or in part, they must consider whether to change them.

Charities need authority from the Charity Commission to change their purposes.

Keeping charity records and accounts

A written record of decisions should be kept. This is usually done by keeping written minutes of the meetings at which decisions were made.

Separate records and accounts must be kept for the charity. Charity and local authority income, capital and records should not be mixed up.

Minutes should note where Charity Commission consent has been obtained.

Annual returns, reports and accounts

Check with the Authority’s accounts team that relevant accounts are being prepared and filed.

All charities (whether registered with the Charity Commission or not) must prepare accounts and make them available on request.

Linking charities

If the local authority is a trustee of several charities, then it can apply to link them for accounting, registration and reporting purposes. This means that as a trustee, an authority only needs to produce one set of accounts for all the charities.

If the local authority no longer wishes to be a trustee

Check the charity’s governing document and follow the process for appointing new trustees.

If the governing document does not have suitable appointment provisions then consider:

Changing the governing document to remove the local authority as the trustee and/or introduce a power to appoint trustees.
possibly using the statutory power to appoint trustees in section 36 of the Trustee Act 1925 where a trustee “..desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, or refuses or is unfit to act therein…”

Subject to the terms of the Trusts governing document and the Charities Acts consider:

Transferring the charity’s land and assets to an existing trust/charity
Setting up a new independent charity such as a company limited by guarantee or a Charitable Incorporated Organisation to take over the responsibility of trusteeship
Selling the charity land/asset and using the proceeds of sale for charitable or other charitable purposes
Applying to the Charity Commission for an alteration to the charitable purposes of the Trust

It is also for Authorities to review their practices as where local authorities have failed to comply with their legal duties as charity trustees then these failures can be costly and resource-intensive to remedy for both councils and for the Charity Commission as the regulator.

Paul Hilsdon is a partner at Geldards.