28 June 2017

Can charities make investments?

HMRC’s revised guidance provides charities with greater flexibility when it comes to the types of investments they can make.

All charities are able to invest but it’s important to remember that making an investment doesn’t come without its risks. As a result, HMRC historically had rigid rules about the type of investments a charity could make and straying out with these limits often triggered unwanted tax consequences.

According to HMRC guidance, in order to be classed as an ‘approved investment’, it should be made ‘for the benefit of the charity’.

As such, any income and gains associated with an investment is exempt in the hands of a charity as long as it meets HMRC’s definition of an ‘approved’ loan or investment. Where a loan or investment is not ‘approved’ it is treated as non-charitable expenditure by HMRC, resulting in the charity’s tax exemptions being restricted.

HMRC has long held the view that for an investment to be ‘for the benefit of the charity’ it should yield a market rate of return or be used to carry out the charity's objectives, but not both.

More charities than ever before are making social investments. A social investment (as opposed to a financial investment) has mixed motives; to further the charity’s objectives and achieve a financial return. HMRC recognises that charities need more flexibility to make social investments and, as a result, has published revised guidance on their interpretation of ‘for the benefit of the charity’. It is now accepted that loans or investments that provide a below market rate of return may still be ‘for the benefit of the charity’ if it can be demonstrated that the loan or investment also furthers the charity’s objectives.

Although we welcome the greater flexibility that is available to charities, trustees need to be aware that they still have overall responsibility for the charity’s funds and may be asked to justify investment decisions.

If you have any questions or would like further information, please contact Kirsty Murray or Catriona Macleod on 0131 473 3500.

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