Charitable trusts and non-charitable purpose trusts - Advant...

Learning Outcomes

This article outlines the significant advantages conferred upon charitable trusts compared to non-charitable purpose trusts, including:

• The exemption of charitable trusts from the beneficiary principle and the practical distinctions from private purpose arrangements, focusing on Re Denley-type trusts, the narrow Re Endacott anomalies, and the need for identifiable beneficiaries in non-charitable structures.
• The enforcement and regulatory oversight of charities through the Attorney General and the Charity Commission, contrasted with the enforcement vacuum that often renders non-charitable purpose trusts ineffective or void.
• The relaxation of perpetuity constraints for charities, covering the rule against inalienability, the modern 125-year perpetuity period, and the charity-to-charity gift exception, and how these rules restrict non-charitable purpose trusts in exam-style problem scenarios.
• The principal direct tax reliefs and exemptions available to charities (Income Tax, CGT, IHT, SDLT, and Business Rates), together with the statutory conditions attached to those reliefs and common traps where relief can be withdrawn.
• The scope and operation of the cy-près doctrine in rescuing failed or outdated charitable purposes, distinguishing initial from subsequent failure, and the role of general charitable intention, the courts, and the Charity Commission in redirecting funds while preserving the spirit of the donor’s gift.

SQE1 Syllabus

For SQE1, you are required to understand the key differences between charitable trusts and non-charitable purpose trusts, particularly the advantages that charitable status brings, with a focus on the following syllabus points:

• The legal requirements for charitable status, including charitable purpose and public benefit (Charities Act 2011 ss 1, 3–4).
• The key advantages charities possess regarding perpetuity rules compared to non-charitable purpose trusts (Perpetuities and Accumulations Act 2009; charity-to-charity exception).
• The main tax exemptions and reliefs available to charitable trusts (Income Tax, Capital Gains Tax, Inheritance Tax, SDLT, and Business Rates), and how Gift Aid interacts with charitable giving.
• The function and application of the cy-près doctrine under the Charities Act 2011 (Part 6), including the role of the Charity Commission and the court.
• The enforcement mechanisms specific to charitable trusts (Attorney General and Charity Commission oversight and schemes).
• The limitations faced by non-charitable purpose trusts due to the beneficiary principle and perpetuity rules, and the narrow exceptions (Re Endacott anomalies and Re Denley).
• The impact of political purposes and mixed charitable/non-charitable objects (exclusivity requirement and ancillary political activity).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which rule restricts the duration of non-charitable purpose trusts but generally does not apply to charitable trusts?
   1. The rule against perpetuities (remoteness of vesting).
   2. The rule against accumulations.
   3. The rule against inalienability.
   4. The beneficiary principle.
2. Which body is primarily responsible for the regulation and registration of charities in England and Wales?
   1. The Attorney General.
   2. HM Revenue & Customs (HMRC).
   3. The High Court.
   4. The Charity Commission.
3. Which doctrine allows a court or the Charity Commission to redirect charitable trust funds to a similar charitable purpose if the original purpose fails?
   1. The doctrine of lapse.
   2. The cy-près doctrine.
   3. The doctrine of resulting trusts.
   4. The doctrine of ademption.

4. True or False: Charitable trusts are exempt from Income Tax, Capital Gains Tax, and Inheritance Tax on funds applied for charitable purposes.

Introduction

Trusts can be broadly categorised based on their objectives: those benefiting specific individuals (private trusts) and those established for a purpose. Purpose trusts themselves divide into non-charitable purpose trusts and charitable trusts. While both aim to achieve an objective rather than benefit named individuals directly, charitable trusts enjoy significant legal and fiscal advantages due to their recognised benefit to society. These advantages stem from specific statutory provisions and common law principles that differentiate them markedly from non-charitable purpose trusts, which often face validity issues related to certainty, enforceability, and duration. Understanding these differences is essential for advising clients and managing SQE1 assessments.

Under the Charities Act 2011, a charity is an institution established for exclusively charitable purposes and for the public benefit. The statutory list of charitable purposes includes relief of poverty, advancement of education and religion, advancement of health, human rights, environmental protection, animal welfare, and other purposes recognised as charitable (s 3). Public benefit has two aspects: the purpose must be beneficial, and the benefit must be to the public or a sufficient section of it. Charitable status brings three decisive advantages: exemption from the beneficiary principle, relief from the rule against inalienability, and access to the cy-près mechanism to preserve charitable funds if the original purpose fails. Charities also benefit from substantial fiscal reliefs, subject to compliance and application of funds for charitable purposes.

Key Term: Charitable Trust
A trust established for purposes recognised by law as charitable (e.g., relief of poverty, advancement of education) which benefits the public or a section thereof, and is exclusively charitable.

Key Term: Public Benefit
The requirement that a charitable purpose must confer identifiable benefit and that the opportunity to benefit is available to the public or a sufficient section of the public. The benefit aspect concerns the merit of the purpose; the public aspect concerns access to the benefit and avoidance of unjustified personal nexus limitations (subject to nuances for poverty relief).

LEGAL AND ADMINISTRATIVE ADVANTAGES

Charitable trusts operate within a unique legal framework that offers distinct advantages over private trusts, particularly non-charitable purpose trusts.

Certainty and the Beneficiary Principle

A fundamental principle of trust law is the beneficiary principle, which requires a trust to have ascertainable beneficiaries who can enforce it (Morice v Bishop of Durham (1804)). Non-charitable purpose trusts often fail this requirement as they lack human beneficiaries. The case law illustrates this: trusts for abstract aims such as “improving international relations” or “maintaining a useful memorial” have been held invalid as private purpose trusts (e.g., Re Astor’s ST; Re Endacott), save for narrow anomalies like the maintenance of specific graves or care of specific animals.

Charitable trusts, however, are a key exception. They do not need ascertainable individual beneficiaries because their purpose is deemed beneficial to the public. Provided the purpose is exclusively charitable and for the public benefit, courts will uphold trusts stated in general terms such as the relief of poverty or advancement of education. The exclusivity requirement matters: mixed objects (“charitable or benevolent”) are problematic because benevolent purposes may not be charitable.

Some private arrangements achieve enforcement by tying a purpose to ascertainable individuals (Re Denley-type trusts), but those remain private trusts that must satisfy perpetuity limits and have identifiable beneficiaries (e.g., employees of a named company). Charitable trusts avoid these constraints because they are treated as trusts for the public.

Key Term: Beneficiary Principle
The general legal rule that a private trust must have ascertainable human beneficiaries capable of enforcing the trust duties against the trustees.

Enforcement

The lack of specific beneficiaries in non-charitable purpose trusts creates an enforcement vacuum. Charitable trusts overcome this through dedicated enforcement mechanisms:

• The Attorney General: Acts on behalf of the Crown as the ultimate protector of charity, with the power to enforce charitable trusts in the courts.
• The Charity Commission: The statutory regulator for charities in England and Wales, overseeing their administration, ensuring compliance, registering charities, and intervening where necessary. It can open inquiries, remove or appoint trustees, and frame schemes (including cy-près schemes) to ensure property continues to be applied for charitable purposes.

Key Term: Charity Commission
The independent regulator of charities in England and Wales. It registers charities, monitors compliance, provides guidance, conducts inquiries, and can settle schemes (including cy-près) to secure the effective use of charitable property.

Key Term: Attorney General
The law officer who represents the public interest in charity matters, with standing to enforce charitable trusts and to bring charity proceedings.

This oversight ensures accountability and proper administration, a feature absent in non-charitable purpose trusts (except for rare anomalous exceptions). As a procedural note, “charity proceedings” usually require Charity Commission consent or the Attorney General’s involvement, reflecting the public character of charitable trusts.

Perpetuity Rules

Trust law imposes rules against perpetuities to prevent property being tied up indefinitely. These rules impact non-charitable purpose trusts significantly but apply differently to charities.

• Rule Against Inalienability (indefinite duration): Prevents capital from being locked up indefinitely for a non-charitable purpose. Non-charitable purpose trusts must be limited in duration (often to 21 years) or allow trustees to spend all capital on the purpose. Charitable trusts are exempt from this rule, allowing them to exist in perpetuity to fulfil long-term objectives. Directions to accumulate income and apply it for charitable purposes indefinitely are valid.
• Rule Against Remoteness of Vesting: For trusts created on or after 6 April 2010, the general perpetuity period is 125 years (Perpetuities and Accumulations Act 2009). The initial gift to a charity must vest within the applicable period, but a gift from one charity to another can take effect at any distance in time—the charity-to-charity exception.

Key Term: Rule Against Perpetuities
A set of legal rules designed to prevent property being tied up in trust for too long. Key aspects include the rule against remoteness of vesting and the rule against inalienability (or indefinite duration).

The exemption from inalienability and the charity-to-charity exception grant charities significant operational advantages, allowing for long-term planning and inter-charity transfers even far into the future.

Worked Example 1.1

A testator leaves £50,000 in their will 'to campaign indefinitely for the abolition of income tax'. The executor seeks advice on the validity of this gift.

Answer:
This is likely a non-charitable purpose trust. Campaigning for a change in law is generally considered a political purpose, which is not charitable. As a non-charitable purpose trust, it is likely void for offending the beneficiary principle (no one to enforce it) and the rule against inalienability (intended to last indefinitely). The £50,000 would likely fall into the residue of the estate.

Flexibility: The Cy-près Doctrine

If the original purpose of a charitable trust becomes impossible or impracticable, the cy-près doctrine allows the High Court or Charity Commission to apply the funds to another charitable purpose that is as close as possible ('cy-près') to the original one.

Under the Charities Act 2011, cy-près can also be applied where the original purposes have been fulfilled as far as possible, where they have ceased to be suitable (e.g., the area or class specified has changed), or where funds can be used more effectively in combination with other property. The Commission or the court will work to preserve the “spirit of the gift.”

• Initial failure: If the charitable gift cannot take effect when it comes into operation (e.g., the named charity never existed at the testator’s death), the court/Commission will apply cy-près only if the donor showed a general charitable intention—an intention to benefit charity broadly, not only a single institution.
• Subsequent failure: If the objectives become impossible or impractical after the trust has come into operation (e.g., the named charity existed but later closed), cy-près applies without needing to show general charitable intention. Funds remain in the charitable domain.

Key Term: Cy-près Doctrine
A legal doctrine allowing the funds of a charitable trust to be applied to a different charitable purpose if the original purpose becomes impossible, impracticable, or has been fulfilled. Initial failure typically requires general charitable intention; subsequent failure does not.

Non-charitable purpose trusts lack this flexibility; if their purpose fails, the property typically results back to the settlor or their estate. Charitable funds, by contrast, are preserved for charity through schemes that adjust to changing circumstances.

Worked Example 1.2

A will leaves “£200,000 to the St Cuthbert’s Orphanage” (a registered charity) for the orphanage’s general purposes. The orphanage closes five years after the testator’s death. What happens to the funds?

Answer:
This is a subsequent failure of purpose. The gift vested when the orphanage existed; the charity later ceased operating. The Charity Commission or the court can apply the funds cy-près to a similar charitable purpose (e.g., a successor organisation or a similar orphan support charity) without needing to show general charitable intention.

Worked Example 1.3

A will leaves “£100,000 to the Newtown Peace Society.” The Society never existed, but the wording and surrounding facts show the testator’s desire to advance peace rather than benefit a particular club. What is the likely outcome?

Answer:
This is an initial failure. The gift cannot take effect at death, as the society never existed. If evidence shows a general charitable intention (benefiting peace-related charitable causes broadly), the court/Commission can apply the funds cy-près to charities promoting peace or reconciliation. Without general charitable intention, the gift would pass on resulting trust to the testator’s estate.

Revision Tip

Remember the key distinction for cy-près: initial failure generally requires general charitable intent, subsequent failure does not. This is a common point of confusion tested in exams. Think also about mergers and changes in legal form—cy-près may still apply to successor entities where the “spirit of the gift” is maintained.

FISCAL ADVANTAGES

Charitable trusts benefit from significant tax reliefs, enhancing their ability to apply funds towards their objectives. Reliefs are subject to statutory conditions and HMRC guidance, and trustees must ensure funds are applied for charitable purposes only.

Tax Exemptions

Subject to conditions (e.g., funds being used for charitable purposes), charities generally enjoy exemptions or reliefs from:

• Income Tax: Exemption for most investment income (bank interest, dividends, rental income) used for charitable purposes. Trading profits are exempt if the trade is a primary purpose trade or ancillary to a primary purpose (e.g., museum shop), or if the trade is small-scale under HMRC’s “small trading” limits. Otherwise, trading can be conducted through a charity-owned trading subsidiary.
• Capital Gains Tax (CGT): Gains realised by a charity on disposals are generally exempt provided the proceeds are applied for charitable purposes.
• Inheritance Tax (IHT): Lifetime gifts and transfers on death to charities are exempt. Additionally, if at least 10% of the net estate is left to charity, the IHT rate on the remainder may reduce to 36% (subject to statutory calculation rules).
• Stamp Duty Land Tax (SDLT): Charities relief is available for qualifying land transactions where the property is to be used for charitable purposes; clawback may apply if the use condition is later breached.
• Business Rates (Non-Domestic Rates): Charities receive mandatory 80% relief on business rates for premises used wholly or mainly for charitable purposes; local authorities may grant discretionary relief up to 100% for the remainder.

These reliefs mean more funds are available for the charity's work compared to non-charitable entities undertaking similar activities. Trustees should consider the VAT position too: specific zero-rating or exemptions may be available (e.g., certain advertising or fundraising events), but VAT rules are complex and charity treatment depends on the nature of supplies and use of premises.

Worked Example 1.4

A non-charitable trust owns a building generating £50,000 annual rental income, used for its non-charitable purpose. A separate charitable trust owns an identical building generating the same income, used for its charitable purpose. Explain the likely difference in their tax position regarding this income.

Answer:
The non-charitable trust will likely pay income tax on the £50,000 rental income (subject to deductible expenses). The charitable trust, provided the income is applied for its charitable purposes, will generally be exempt from income tax on this rental income, meaning the full £50,000 (less expenses) is available for its work.

Exam Warning

Do not assume tax reliefs apply automatically. Charities must meet specific conditions and apply income/gains for charitable purposes only. Failure to comply (e.g., significant non-primary purpose trading within the charity, or property not used for charitable purposes after SDLT relief) can lead to loss of reliefs and possible clawback. Review any stated facts on trading activities, use of assets, and application of funds.

COMPARISON WITH NON-CHARITABLE PURPOSE TRUSTS

The advantages of charitable status become clearer when contrasted with the limitations of non-charitable purpose trusts.

Key Term: Non-Charitable Purpose Trust
A trust established for a specific purpose that is not recognised by law as charitable. Generally void unless falling into specific anomalous exceptions (e.g., care of specific animals, maintenance of graves/monuments) and complying with perpetuity rules.

Key limitations of non-charitable purpose trusts include:

• Beneficiary Principle: Often void for lack of ascertainable beneficiaries to enforce the trust. Private purpose trusts with abstract objects fail; only narrow anomalies or Re Denley-type arrangements (benefiting ascertainable individuals) survive.
• Perpetuity Rules: Must comply with the rule against inalienability, limiting their duration unless trustees can expend capital. Re Denley-type trusts must also comply with the remoteness of vesting/perpetuity period.
• Enforcement: Lack of a dedicated enforcement body; absent beneficiaries, there is no one with standing to enforce. This contrasts with the Attorney General and Charity Commission’s roles in charities.
• Lack of Flexibility: No access to cy-près. If the private purpose fails, property typically reverts on resulting trust to the settlor/estate.
• No Fiscal Advantages: Subject to standard tax rules on income, gains, and transfers.

These limitations make non-charitable purpose trusts unsuitable for long-term or large-scale objectives compared to charitable trusts. Where a settlor wishes to obtain public-facing outcomes and durability, charitable status—subject to meeting the statutory tests—achieves both.

Key Point Checklist

This article has covered the following key knowledge points:

• Charitable trusts require a charitable purpose, public benefit, and exclusivity.
• Charitable trusts are exceptions to the beneficiary principle and are enforced by the Attorney General and Charity Commission.
• Charities are generally exempt from the rule against inalienability, allowing perpetual existence; the charity-to-charity exception applies to remoteness of vesting.
• The cy-près doctrine provides flexibility if a charitable purpose fails, with general charitable intention required for initial failure but not for subsequent failure.
• Charities benefit from significant tax exemptions (Income Tax, CGT, IHT) and reliefs (SDLT and Business Rates), subject to compliance and application of funds for charitable purposes.
• Non-charitable purpose trusts are generally void due to the beneficiary principle and perpetuity rules, unless they fit narrow exceptions or meet the Re Denley model.
• Non-charitable purpose trusts lack enforcement mechanisms, fiscal advantages, and the flexibility of cy-près.

Key Terms and Concepts

• Beneficiary Principle
• Public Benefit
• Rule Against Perpetuities
• Charitable Trust
• Cy-près Doctrine
• Charity Commission
• Attorney General
• Non-Charitable Purpose Trust