Charity Newsletter Spring Newsletter 2014
Welcome to the first digital edition of our charity newsletter. We welcome your feedback on the new format (positive and negative!) and your suggestions on any further topics you would like us to cover.
Moira Protani Partner and head of our charities team. In this edition Jonathan Stephens outlines what charities should be aware of when holding confidential information of individuals, particularly those suffering from health issues; Fiona Campbell-White discusses whether an increase in allegations of undue influence is merely a sign of the times and what charities can do in order to protect their legacy income; I outline the benefits of the provisions of the Trusts (Income and Capital) Act 2013 which came into force in October 2013; and finally we welcome guest author Ruth Corkin of James Cowper LLP who provides a charities VAT update.
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Power and influence Read more >
ersonal confidentiality issues P Read more >
New legislation Read more >
harities VAT update C Read more >
ave the date! S Read more >
Personal confidentiality issues The general law of privacy
Jonathan Stephens is a partner in our private client team.
harities which exist for the benefit of individuals, particularly those who suffer from health issues, often obtain and hold confidential information about them. This may be necessary in order to determine accurately the individuals’ status, and their entitlements under the terms of the charity. What happens if a third party, such as a family member or someone seeking to help, approaches the charity with a request for information? Is the position different if the request is made after the beneficiary has died?
There is no general protection for privacy at common law, but the right to privacy in certain personal matters has long been held to be one which the law should seek to protect. In addition, statutory protection has been extended by the Human Rights Act 1998 and the regulations surrounding confidentiality of medical records. Human Rights Act 1998 Article 8 of the European Convention on Human Rights states that “everyone has the right to respect for his private and family life, his home and his correspondence”. The Act has led to the development of actions for the misuse of private information. This requires a court to determine whether or not there is a “reasonable expectation of privacy”. It may be that the charity will obtain information about a beneficiary which is both private
and sensitive, and there would certainly seem to be a reasonable expectation that such information would be kept private. Data Protection Act 1998 The Act relates to “personal data” which means data relating to a living individual. There is a further category of “sensitive personal data” which includes information as to an individual’s “physical or mental health or condition”. There are additional obligations to be met in handling sensitive personal data. One of these is that where the data is processed by a not-for-profit body, it must be carried out with appropriate safeguards for the rights and freedoms of the individual, and “must not involve disclosure of the personal data to a third party without the consent of the data subject”. Much of the Act relates to an individual’s
rights to obtain information held about him, and to ensure that it is appropriate and correct. Because the Act only applies to data relating to living individuals, those rights of access to information cease on an individual’s death. Medical records Special rules apply in relation to confidentiality between medical professionals and their patients. Regulations made under the National Health Service Act 2006 deal with the processing of prescribed patient information for medical purposes. Frequently a charity may obtain a certain amount of information relating to the medical status of its beneficiaries. Where such information has been obtained from the beneficiaries’ medical professionals, it has been obtained under conditions of confidentiality.
The general rules of confidentiality following a death The rules of confidentiality do not end on the death of the individual. Insofar as confidential information possesses the character of property, it devolves on death on the individualâ€™s personal representatives. Their right to act is evidenced by the grant of probate, or letters of administration (where there is an intestacy). Special rules apply following a death in relation to medical information The Access to Health Records Act 1990 provides that only specific people have the right to apply for access to the health records of someone who has died. They are the personal representatives, and any person who may have a claim resulting from the personâ€™s death. Applications by persons other than the personal representatives are judged on a case-by-case basis.
Summary If a charity were to provide information to persons who are not entitled to it, it could be in breach of its legal duties and hence open to legal sanctions. Considerable care should therefore be taken where such requests are made. If the request is from the personal representatives of a deceased beneficiary, and their authority is demonstrated by the grant of probate (or letters of administration) it would seem that they are entitled to the same information that the deceased would have been if he had asked for it himself. If someone other than the authorised personal representatives seeks information relating to a deceased beneficiary (and in particular medical information) it would be advisable to refuse such information but to point them towards their rights to obtain such information elsewhere under the Access to Health Records Act 1990.
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Power and influence
B Fiona Campbell-White is a partner in the legacy team.
arely a month goes by without a Court case involving an allegation that someone has been unduly influenced into giving away property either during their lifetime or in their Will. Is this a sign of the times in this age of increasing lifespans and thus reliance on carers (both professional and family members)? Charities need to be aware of these cases both in terms of protecting their legacy income and if they work with vulnerable adults who may be subject to pressure from relatives or carers.
Questionable lifetime gifts A presumption of undue influence arises when there is a relationship of trust and confidence between the person making the gift and the person receiving the gift and the gift calls for an explanation e.g. due to its size. There have been a number of cases involving this presumption this year. In Tociapski v Tociapski1 a father gifted his property to his son. The Court considered that there was a relationship of trust and confidence between the father and son and that the gift called for an explanation. It therefore examined whether there was a legitimate reason for the gift, e.g. as an estate planning measure. The Court concluded that there were no inheritance tax reasons for the gift. Due to medical issues the father was dependent upon his son (and thus was easily pressurised by him) and he had not received any independent advice on the gift. The son was therefore unable to explain the transaction and the Court set the gift aside for undue influence. Hart v Burbridge2 concerned the sale by a mother of two properties in order to fund the purchase of another property that was put into the names of her daughter and son-in-law. The mother, who was reliant on her daughter for help in dealing with her affairs, had not received any independent advice and the Court held that there was no explanation as to why the transactions had
taken place. Accordingly, the sales of the motherâ€™s properties were set aside for undue influence. In both of the cases described above, the presumption that the transactions in question had come about as a result of undue influence could have been countered if the children had been able to show that their parents had made the transactions after full, free and informed thought. Neither could. Dubious Wills The legal test for a Will to be set aside for undue influence is far stricter than that applied to lifetime gifts. It has to be shown that someone coerced the testator into making a Will which he would not have made had he not been subjected to undue influence. It is therefore not just necessary to show that someone persuaded the testator to make a new Will, but that the persuasion overstepped the mark and became â€˜undueâ€™. The recent case of Schomberg & Anor v Taylor & Ors3 is an interesting illustration of what can amount to undue influence in the context of Wills. The Court found that the testatrix had been unduly influenced by her brother whose constant pressure had worn her down to the extent that, simply for a quiet life, she made a new Will in terms her brother suggested. The Court noted that in making the new Will the testatrix excluded
beneficiaries under her earlier Will with whom she still had a close relationship. Interestingly, the pressure was deemed sufficient even though it was exerted over the telephone from Spain (which is where the brother lived) and even though the brother did not actually benefit from the new Will (his sons did). Whilst the judgment in this case underlines that strong evidence that actual coercion took place is required for a claim of undue influence in respect of a Will to succeed, it also shows that the Court recognises that coercion may take different forms. Coercion includes physical violence or verbal bullying, but may also include circumstances in which one person who is in a vulnerable position is persistently pressurised by another, to such an extent that the person being pressurised may be induced, in order to be left alone, to make a new Will. Conclusion These cases are likely to be the tip of the iceberg. Exploitation of the vulnerable is happening on a regular basis and charities need to be alive to this issue and how it affects them.
 EWHC 1770 (Ch)  EWHC 1628 (Ch) 3  All ER (D) 74 (Jan) 1 2
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Moira Protani Partner and head of our charities team and guest writer Jonathan Oâ€™Shea Chief Executive St Johnâ€™s Bath.
Total return, permanent endowment and all that jazz: A focus on almshouses
harities that operate almshouses usually have objects which focus on relieving poverty and other needs of their beneficiaries such as providing accommodation for the elderly. Beneficiaries may be defined by reference to a particular geographical area in which the accommodation is situated or to the personal characteristics of the beneficiaries, such as former employees of a particular company or sector. It is rare to have objects which expressly require the trustees to preserve the almshouses by reason of any special heritage considerations.
They may: (a) Own very old buildings with or without planning restrictions; (b) if lucky, have an endowment fund the income from which is sufficient to pay for minor but not major repairs to the buildings; (c) if luckier, have an endowment fund or unrestricted funds of a sufficient amount not only to pay for repairs but also to relieve other needs of their beneficiaries including the provision of alternative housing to the traditional almshouse.
Let us first consider the worst case scenario - an almshouse charity with old buildings in dire need of repair and renewal which are occupied to full capacity with elderly and needy residents, but no available endowment with which to pay for repairs. A developer has offered to buy the almshouse which will be knocked down to make way for a new housing development that would include a new almshouse to be given to the charity at no extra cost. In the meantime, the residents would be re-housed at no cost to the charity. Nirvana! Can the trustees accept this offer? If satisfied that the interests of the beneficiaries would be met - yes.
A sale without a replacement property is also permissible, although this is not necessarily a “get out of jail free card”. The interests of the beneficiaries will be paramount and if this would, or could, result in them being homeless, it is unlikely to be a viable option. The practical difficulties associated with a sale, such as the relocation of residents, the emotional upheaval concerned, and potential complaints from elderly almshouse residents and their families, as well as from neighbouring residents (who may be concerned about a redevelopment of the site) may well outweigh any potential financial benefits to the charity.
The trustees have a power of sale and do not need to obtain an order or scheme of the Charity Commission authorising the sale of the almshouse. This is so even if the governing document (often a Charity Commission scheme) does not confer an express power of sale. Case law provides that land is not subject to a restriction on sale unless the trustees are required to use a specific property for furthering their objects and even then a sale is permissible if the sale proceeds (or other unrestricted funds) are applied in providing replacement property. So, unless the objects provide for the preservation of the almshouse for its own sake, it can be sold to the developer if the trustees are satisfied that the best interests of the beneficiaries would be served by the provision of new accommodation on the terms proposed.
Let us now consider the second scenario where the almshouse is in need of substantial repair and there is a small endowment fund. Graham Divers of the Charity Commission gave a very helpful explanation of what is meant by permanent endowment in the Winter 2012 edition of the Almshouse Gazette. He suggested borrowing from permanent endowment with or without the need to repay the capital as possible solutions. However, if the endowment is “permanent”, the law doesn’t permit trustees to borrow it without replacement (or recoupment as it is sometimes called) although trustees may be able to exercise statutory powers to spend permanent endowment or take advantage of the “total return” approach to investment the effect of which is to release an element of capital from the restrictions on expenditure of permanent endowment.
it. Concurrence may be express or implied. It is implied if the Charity Commission does not object in writing within three months. If the Commission asks the trustees for further information about the resolution, concurrence is delayed. Investing on a ‘total return’ basis In the last scenario there may be a larger permanent endowment fund where trustees would like to spend some of the capital returns on repairs and maintenance of almshouses or other needs. Spending Permanent Endowment Statutory Powers to Spend Capital There are two statutory powers to spend capital. The first applies where the gross income in the last financial year did not exceed £1,000 or the market value of the endowment did not exceed £10,000. The second applies where both of those limits were exceeded. In both scenarios the trustees may, if satisfied that the objects could be carried out more effectively if the capital could be expended, resolve that the endowment should be freed from restrictions on spending capital In the first scenario, the resolution is effective immediately and a copy of the resolution should be filed with the Charity Commission. In the second scenario, the resolution is not effective until a copy of the resolution has been filed and the Charity Commission has concurred with
Many almshouses have permanent endowment in the form of an investment portfolio as well as their almshouse accommodation. So far as the investment portfolio is concerned there is a duty to invest it for capital appreciation and for income return in order to balance the needs of future and present beneficiaries. With the increasing pressures on achieving any type of investment return, this becomes a difficult process and many investment advisers look to invest charitable funds on a “total return” basis where they can take into account the totality of the investment return rather than attempting to balance income return and capital growth. This requires them to ignore the distinction between capital and income which isn’t possible with the traditional mode of investment of permanent endowment funds where capital growth is added to the value of the permanent endowment.
However, the Trusts (Income and Capital) Act 2013 allows trustees to resolve that the permanent endowment funds of the charity should be invested on a total return basis provided they are satisfied that this would be in the interests of the charity; there is no need to obtain authority from the Charity Commission.
think will best further their charity’s aims now and in the future. Jonathan O’Shea explains below why the trustees of St John’s Hospital decided that it was in the best interests of that charity to invest on a total returns basis.
Investing on a total return basis has the advantage of allowing trustees to allocate the total investment return in the way they
St John’s is a long established charity with endowed assets which are used to fund the ongoing activities of the organisation. These activities include the provision of 100 units of almshouse accommodation and the distribution of grants of £450,000 per annum to the local community. We want to provide this level of support on a consistent basis, but this can prove to be a challenge when the income yield on investments is under strain, as we have experienced in recent years. In order to avoid the potential pitfalls of fluctuating returns, we have adopted the total return approach to the distribution of our investment returns. This means that we decide on the level of distribution, a percentage of our invested assets, say 4% and distribute this consistently even if the income yield on our investment reduces. This is sustainable provided the distribution rate is achievable compared to the total investment returns over the long term.
This allows us to make long term investment decisions rather than repeatedly adjust our investment criteria to react to the changes in investment yield and our income needs for service provision. In turn this should enable our investment managers to achieve a better overall return (i.e. capital and income) and hence be better for the overall financial health of the organisation. We only adopted total return at the end of 2012 and we will be making our first decision on the distribution rate for future years at the end of this year so that we have it in place for 2014. This will give us the ability to look to the future with confidence and know that we can maintain the delivery of our services at a consistent level. Jonathan O’Shea Chief Executive at St John’s Bath 1
The Act allows the Charity Commission to make regulations regarding the steps trustees must take when deciding to adopt the power to invest on a total returns basis and contains a number of safeguards, including a requirement for trustees to take advice on the proper exercise of the power. In brief, the trustees must identify and record, at the time when the resolution to adopt the new power is made, the part of the existing permanent endowment which represents unapplied total return. This involves distinguishing between the original investment on the one hand and the amount of unapplied returns (being capital gains and any retained income) on the other. The trustees may then decide, from time to time, what part of the unapplied total return (whether from interest, dividends or capital gains) shall be applied as income. The remaining balance is carried forward as unapplied total return and invested as capital. Trustees have a duty of care when making their allocations and the unapplied total return should reflect the equivalent of a sum equal to what would have been the capital value taking account of inflation and the need to preserve the endowment for future generations of beneficiaries. In the case of a long-established charity such as St Johnâ€™s Hospital investing on a total return basis means that the trustees will be able, if they so choose, to spend capital gains accumulated over many
decades in meeting the needs of the current beneficiaries of the charity, without affecting the needs of future beneficiaries.
The regulations also permit the trustees to allocate not more than 10% of the permanent endowment funds for application subject to the funds being recouped by the trustees over such period of time as they reasonably determine.
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16 GUEST ARTICLE
Charities VAT update
t has been a busy year for VAT and charities. In particular, three First Tier Tribunal decisions have intimated that a significant number of grants are likely to be subject to VAT. One case was decided upon the written evidence provided by the Appellant, which was found to be insufficient to demonstrate that the income was outside the scope of VAT.
In the second case (unusually) the Appellant argued that the income from a block grant was, in fact, related to a taxable supply and was third party consideration for that supply. The Tribunal agreed with the Appellant and allowed the appeal. In the third case, the services being supplied were considered to be taxable, but because the Appellant was a statutory body (albeit one set up in another country) the supplies
were non-business in nature and output tax was not due on the supply.
the funder is willing to pay the VAT if it is required to be charged.
HMRC are now reviewing their policy approach to grant income and I have received assurance that updated guidance will be available this year. Until then, advisors and charities will just have to manage as best they can!
If a partial exemption method is used to calculate the input tax recoverable I would also advise that it is checked to ensure that it does comply with the calculation rules. This is regardless of whether the standard or a special method is used.
Indeed, I have recently seen a number of funding agreements with “closed” VAT clauses that prevent the recipient seeking any sums of VAT from the funds should they become subsequently due.
In addition to this, I have seen an increase in the number of partial exemption methods which have come under scrutiny. In one case, HMRC are seeking to backdate an assessment to a time when the special method was approved, on the basis that the client had not been operating it correctly. I have also seen, firsthand, that HMRC are treating collaborative funding as a single supply made by the lead “partner” or “member” to the funder. This then puts the other “partners” or “members” on the same footing as subcontractors and this can mean that the VAT treatment of their supply is different to that of the supply to the funder. So for all charities (and I include all not-for-profit bodies in this), it is important that contracts for funding are checked to ensure that the nature of any services would not give rise to a VAT charge and, if they do,
Hope In The Community Limited v The Commissioners of Revenue and Customs Groundworks Cheshire Limited v The Commissioners of Revenue and Customs South African Tourist Board v The Commissioners of Revenue and Customs
Ruth Corkin is VAT Senior Manager at James Cowper LLP. Contact E: firstname.lastname@example.org T: 01865 861166
Wilsons host Charity Trustee seminar Wilsons held a seminar for charities at their Salisbury office on 6 November in support of Trustees’ Week, an annual event which aims to showcase the great work that charity trustees do and to highlight opportunities for people from all walks of life to get involved with charities and make a difference. Attendees were trustees and senior staff of various charities based throughout the region. We were also delighted to welcome Andrew Lord, Chief Executive of Alabaré Christian Care & Support who made a closing speech. Speakers from the Wilsons’ team showed their expertise in advising charities on charity law, property, employment, tax, and contentious legacies. Our guest speaker, Ruth Corkin from James Cowper, talked about the difference between a grant to charity and a service level agreement and the impact of VAT.
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Save the date! Thursday 1 May 2014
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Sarasin & Partners Trustee Training and Investment Seminar
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Moira Protani will be speaking at Sarasin & Partners Trustee Training and Investment Seminar on Thursday 1 May. The seminar is taking place at Bowood Hotel in Wiltshire from 9.30-4.30pm. To register your attendance please email firstname.lastname@example.org
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