A glance at the financial resources of almost any independent school will show that it has access to charitable funds which can only be used in particular ways, advises Laura Soley and Alice Faure Walker

 

Restricted or endowment funds vary in history, nature and size. They may have come from donations, grants, legacies or fundraising appeals. They may be held for scholarships, prizes or capital projects. Some may have their origin in mergers with other schools. And they may be held by the school itself – or by an associated charity. The feature they all share is that they can’t be freely spent on the school’s activities. This can be frustrating, particularly in a challenging financial environment.

The good news is that there are ways of unlocking charitable restricted and endowment funds. We have seen a recent increase in inquiries from educational institutions asking about the scope to access restricted funds and endowments. This is driven partly by financial pressures, but also changes to the law last year which removed some of the red tape involved in accessing these funds.

What does a school wishing to explore unlocking its restricted funds need to know?

Jargon buster – what are restricted funds and endowments?

The most common types of funds are:

Permanent endowment funds – these are funds held on the basis that the underlying capital must be invested and only the income generated can be used for the purposes of the fund. These might be the school’s general purposes, but will often be narrower purposes, such as for a prize or scholarship.

Restricted income funds – here the funds must be used for particular purposes – such as for a particular discipline, or to provide facilities. Unlike permanent endowment funds, the whole of the fund can be spent for these purposes.

In legal terms, restricted and endowment funds are generally held “on trust” and controlled by trustees – in many cases the only trustee will be the school itself.

Step 1 – Review the terms of the funds

The first step is to identify the restricted and endowment funds, and the nature of the restriction. This can be challenging. The paperwork associated with particular funds may be lost in the mists of time, so you may need to delve into old records.

But it can reap huge rewards. We’ve reviewed restricted funds and endowments for many charities over the years and we invariably find that at least one fund is not restricted at all. For instance, a donor may have simply expressed a wish that their gift should be used for particular purposes, but not imposed a legally binding restriction. Here the gift is not actually restricted – the trustees of the fund can choose to follow the donor’s wishes, but don’t have to.

A review of the paperwork can sometimes unearth misunderstandings about the purposes of the fund. For instance, for years a fund may have been used for science scholarships, but closer examination may show that it can actually be used more widely.

Reviewing the funds can sometimes be time consuming – but fascinating – and is an essential part of the school’s stewardship of its resources, because the trustees of charitable funds are under a legal obligation to make sure that they review their funds from time to time. Often this is the only step that’s needed; once a school has a better understanding of its restricted and endowment funds it’s in a far better place to make the most of them.

Step 2 – Explore a change to purposes

The next step is for the school to think about whether the purposes of its funds are suitable and effective today. They might be dedicated to a field of study that the school no longer provides. Or to a prize that’s no longer awarded. The fund might represent the surplus on a capital project, so not be required for the capital project any longer.

If this is the case, there’s scope to update the purposes and make them more flexible. There are two main ways that the trustees of the fund can change its purposes.

The first is to use a power included in the terms of the fund itself. There will sometimes be an express power allowing the trustees of the fund to change the purposes – sometimes the Charity Commission will need to consent.

There is also a really useful statutory power. Since March last year, the trustees of restricted and endowment funds have had a statutory power to change their purposes, generally by simple resolution. The trustees must be satisfied that the change is “expedient in the interests of the fund”. This will be easy to demonstrate where the purposes of the fund are clearly out of date.

We’ve helped trustees change funds so that they can be used for wider public benefit – for example, merging and updating small individual prize and scholarship funds so that they can be used to provide broader support for pupils through bursaries and other financial assistance. Or there might be an argument the funds could be better used to help boost the school’s finances generally – for example where the fund is restricted to a narrow subject or activity and the funds would be better spent to support the school more widely.

The trustees must decide on new purposes – and will need to consider whether they ought to consult with any relevant stakeholders. They will need to ask the Charity Commission for its consent. They’ll need to demonstrate to the Charity Commission why the change is in the interests of the fund and that the new purposes are suitable and effective in current economic circumstances. The Commission will expect the new purposes to be similar to the old ones, but only in so far as is reasonably possible.

The new power introduced in March last year replaced a two-tier regime under which smaller funds (with income under £10,000 a year) were able to change their purposes – provided the Charity Commission didn’t object. But it was necessary to seek a scheme from the Charity Commission to update purposes of larger funds – a lengthy and potentially expensive process. Now all funds, regardless of size, are subject to the same regime.

Step 3 – Consider releasing endowment funds

Endowment funds can be a great source of income for a school. The capital is tied up in perpetuity – designed to grow and produce an income which can be used for the purposes of the fund. But the restrictions can be frustrating, especially where the income level is too small to be useful, or the school needs more funding. For example, we often see endowment funds held for scholarships and prizes which generate such a small income that it’s all used up in the administration of the fund.

There’s good news here too. There are statutory powers for the trustees of permanent endowment funds to access the capital in a variety of different ways. These powers include:

• Where the trustees are of the view that the purposes of the fund would be better served if the capital, as well as the income, could be spent, they can resolve to release the restrictions so that the whole fund can be spent. Where the fund is worth more than £25,000, they will need Charity Commission consent.
• Since 2023 there’s a power to borrow up to 25% of the permanent endowment fund – provided there’s a plan in place for repayment within 20 years.

The powers are subject to various conditions. There are also particular rules where the endowment includes land.

These powers won’t be a cure-all – and they shouldn’t be exercised lightly – but we’ve seen them used to great effect to free up endowment funds. They are often used side by side with the power to change the purposes of the fund described above.

Step 4 – Action the decisions

Once the trustees have reviewed the funds and identified what powers they have, they can consider taking steps to make the changes, making sure that they have the Charity Commission’s consent where it’s needed.

The statutory powers are designed to reduce red tape and free up funds. Our experience is that they do just that, and can sometimes give a significant boost to school finances.

 

Laura Soley is a partner and Alice Faure Walker a senior counsel at law firm Bates Wells