Head 20: Charitable and Charity Trusts

Question 1

When is a trust charitable?

Answer 1

A trust is charitable if it is a public trust which is registered in the Scottish Charity Register (this can be contrasted with a public trust which is not so registered - a non-charity trust).

At common law a trust is charitable if it is a public trust for one or more of:
• the relief of poverty 

• educational purposes 

• religious purposes. 


Question 2

What are Charity trusts governed by?

Answer 2

Charity Trusts (and non-trust charities) are governed by the Charities and Trustee Investment (S) Act 2005. Regulation and monitoring is by a public body (OSCR) rather than the beneficiaries.

Question 3

What are charities if not trusts?

Answer 3

Many charities are not trusts, they may be:
⁃ Corporations
⁃ Companies limited by guarantee
⁃ Scottish charitable incorporated associations

Question 4

What is the distinction between charity trust and non-charity trusts?

Answer 4

But a more meaningful distinction nowadays is between a public trust which is registered in the Scottish Charity Register - a charity trust, and a public trust which is not so registered – a non-charity trust.

Question 5

How do you register as a charity?

Answer 5

The Scottish Charity Register
⁃ The Scottish Charity Register comprises:
⁃ All pre-existing bodies which were recognised as charities for tax purposes (s 99)
⁃ Other bodies which have been added to the Register later by application

⁃ The Register is administered and charities are regulated, by the Office of the Scottish Charity Regulator (OSCR), a body corporate consisting of at least 4 members.

Question 6

What test must you satisfy to register as a charity?

Answer 6

In order to be registered as a charity you must satisfy a two-pronged test:
⁃ 1) Purposes consist only of one or more of the charitable purposes listed in s 7(2), and
⁃ 2) It provides public benefit (s 8)
⁃ The public benefit can be in Scotland or elsewhere.
⁃ One must consider the benefits to member so fate body and disbenefits to the public against the benefit to the public or a section of it. And if there is a benefit to only a section of the public then the conditions must not be unduly restrictive.

Question 7

What can a registered charity call itself?

Answer 7

A registered charity has the exclusive right to describe itself as a ‘charity’, ‘charitable body’, ‘registered charity’ or ‘charity registered in Scotland’ (s 13)

Question 8

How are charities supervised?

Answer 8

The 2005 Act sets up quite an an onerous monitoring and supervision regime for registered charities. It is a mixture of control by OSCR which can apply to the CoS for bigger and better orders if it wants to.

DN - not going into the details since you don’t really need to know them unless you specialise in this area.

Question 9

What are the charity trustees’ duties?

Answer 9

Charity trustees’ duties - common law (see Head 17), ‘general duties’ imposed by s 66.

Question 10

What happens if a charity trustee breaches its duties?

Answer 10

Breach - ‘misconduct in the administration of the charity’, s 66(4) - triggers various powers of OSCR and the Court of Session. Thus OSCR may by itself suspend a trustee or give a direction restricting transactions (s 31(1)). And the Court of Session, on application by OSCR, may interdict a particular action, restrict the transactions which may be entered into, and dismiss or appoint trustees (s 34(1)).

Question 11

What are the rules for the maintenance of the accounts of charities?

Answer 11

• A charity trust must keep proper accounts and send annual accounts to OSCR (s 44).
  
  • A charity trust must act with the care and diligence that it is reasonable to expect of a person who is managing the affairs of another person (s 66(1)(b)).

Question 12

What happens if there is a machinery lacking in the charity trust?

Answer 12

The law looks kindly on charities

a) Initial failure
If there is an initial failure (e.g. the trust cannot work right from the start) the law may help out:

⁃ 1) Machinery lacking
⁃ So if there is a charitable purpose but there is no machinery to carry these purposes out. In these circumstances the CoS will provide the necessary machinery under the Nobile Officium powers:
⁃ Magistrates of Dundee v Morris 1858

Question 13

Magistrates of Dundee v Morris 1858

Answer 13

⁃ A trust was set up for providing for a ‘hospital[ Charitable institution for the needy young.]’ in Dundee for 100 boys. The HL held that the bequest was valid even though there was no machinery there at all - the CoS was asked to prepare a scheme to allow the purposes to be carried out.

Question 14

What happens if there is a failure of purposes of the charity trust?

Answer 14

⁃ It may be that the purposes fail altogether. In these circumstances the court does have powers but there is required to be a ‘general charitable intention’ by the truster - this relates to having some definite charitable purpose. This can occur in a number of ways where the purposes can no longer be carried out
⁃ Burgess’s Trs v Crawford 1912

Question 15

Burgess’s Trs v Crawford 1912

Answer 15

⁃ After two liferents the residue was to be applied in founding, erecting and endowing in Paisley an industrial school for females. But by the time the second liferent had expired private industrial schools had been outlawed. The trust purpose could no longer be carried out.
⁃ The court held that there was no general charitable intention since it was tied specifically to setting up an industrial school. The court could not do anything.

Question 16

*Pomphrey’s Trs v Royal Naval Benevolent Trust 1967

Answer 16

⁃ This involved a bequest to a body which never existed. The testator left the residue of his estate to be split into 3 - a third to the army benevolent fund, a third for the airforce benevolent fund but the remaining third was left to the ‘royal navy benevolent fund’ which did not exist. There was however a ‘royal navy benevolent trust’ and a ‘royal naval benevolent society’.
⁃ The court held that looking at the scheme of the will there is a general charitable intention to benefit all the armed forces and in particular for this third to benefit all ranks in the navy. So a cy pres scheme was set up by the court in which 1/6 was given to each of the ‘royal navy benevolent trust’ and a ‘royal naval benevolent society’.
⁃ [NB this seems to be different from succession law (e.g Cathcarts Trustees v Bruce) because the law looks favourably on charities so court tried to equitably divide the money between the two possible beneficiaries rather than simply declare it void.]

Question 17

When is a bequest to charity of charitable institutions valid?

Answer 17

A bequest to charity of charitable institutions generally is valid provided the testator appoints executors or trustees to make the selection:

Question 18

Angus’s Executors v Batchan’s Trustees 1949

Answer 18

⁃ By the time the residue came to be distributed the original trustees had died without assuming anybody else. The court held that a court appointed judicial factor can’t exercise this choice, so the bequest was invalid.
⁃ [This is an extreme example since normally there will be trustees around who can exercise the choice.]

Question 19

Do charities pay tax?

Answer 19

Tax treatment is a big advantage for being charitable. Exemptions are given to UK income and CGT by the HMRC who apply the tests in the English Charities Act 2006 s 2 (which is very similar to the Scottish 2005 Act.

⁃ NB you don’t need to be a registered charity to receive these exemptions. If you are not a registered charity you can apply directly to HMRC who will decide whether you are a qualifying charity.

Question 20

Who is provided with local tax relief?

Answer 20

This is given only to registered charities e.g. Non domestic rates on premises. Local Government (Financial Provisions etc.)(Scotland) Act 1962, s 4(10).