The law and charity investments
If you are planning to invest some or all of your charities monies, you should read the Charity Commission’s detailed guidance on investing charity funds. This sets out the legal requirements in more detail.
However in summary, when you invest your charity’s funds, by law you must:
- know what you can and can’t invest in – follow any restrictions in your governing document (this will be specific to you)
- make sure you know what you’re doing when making investment decisions – it is strongly recommended that you take advice from an expert where necessary
- minimise risk to your charity’s funds, for example by having a mix of investments rather than a single large investment which could drop in value – there is where an investment manager can add great value
- explain your investment policy in your trustees’ annual report
Reasons to invest
You can invest money to generate income for your charity to spend on its aims – this is known as a financial investment. For example, buying a property to get a rental income. This strategy could greatly help to increase the longevity of your charity funds.
Your investments need to get the best possible financial return for the level of risk you consider acceptable. For example, government bonds have a guaranteed return, but stocks and shares will fluctuate according to the market. Charity investments can be tailored to meet your specific goals and objectives.
It is possible to choose only to make financial investments in areas that reflect your own charity’s values and ethos. You need to be able to explain why this approach is right for your charity, even if the financial returns are less. For example, investing ethically might prevent you from losing supporters or damaging your reputation.
You can also invest money to meet your charity’s aims directly – this is known as programme related investment. For example, an unemployment charity making loans instead of grants and using the interest to help fund more loans.
Programme related investment involves spending money to meet your charity’s aims. This means:
- any financial return made is a secondary consideration – you do not have to get the best possible return
- any benefit to private individuals such as investment advisers must be necessary, reasonable and in the interests of your charity
- you must be able to end the investment if it no longer meets your charity’s aims
Investments which are neither completely financial nor programme related are known as mixed motive investments.
What to invest in
You can invest your charity’s funds in anything which you expect to keep or increase its value, such as cash deposits, stocks & shares, property or common investment funds. All investment carries risk and you need to be clear about:
- the reasons why you are investing
- what you hope to gain from the investment
- how much risk you are prepared to take – this can be typically done with a risk profile questionnaire
- how you will manage your investments and monitor their performance – reporting is essential
If you invest your charity’s funds in something which you intend to sell on for profit, this can count as trading and you may have to pay tax on any profits you make.
How to invest
You need to keep overall control of your charity’s investments. This means you need to monitor how they perform and make all decisions about your charity’s investments.
If your trustee board doesn’t have the skills and experience necessary, you need to take advice from someone who does. You must make sure that any advice you receive is impartial and independent
Using investment managers and advisers – legal requirement
You can use an investment manager or adviser but the trustees still need to make or approve investment decisions.
Heritage Financial Solutions are independent and directly authorised with the Financial Conduct Authority. Our team have over 100 years of combined experience, including managing charity investments and trusts. If you would like to know more and have a free initial chat – please contact one of the team.