Charitable trusts and non-charitable purpose trusts - Definition and characteristics of charitable trusts

Learning Outcomes

This article explains the legal definition and core requirements of charitable trusts in England and Wales. It focuses on the criteria set out in the Charities Act 2011, including the need for a recognised charitable purpose, the public benefit requirement, and the principle of exclusive charitable purposes. Your understanding of these elements will enable you to identify valid charitable trusts and distinguish them from other trust types, applying these principles to SQE1-style single best answer MCQs.

SQE1 Syllabus

For SQE1, you are required to understand the fundamental legal principles governing charitable trusts, particularly how they are defined and what makes them valid. This includes differentiating them from private trusts and non-charitable purpose trusts. Revision should focus on:

• The statutory definition of charity under the Charities Act 2011.
• The recognised charitable purposes listed in the Charities Act 2011.
• The requirement for public benefit, including its two aspects (identifiable benefit and benefit to the public or a sufficient section).
• The requirement that the trust's purposes must be exclusively charitable.
• The key characteristics that distinguish charitable trusts from private trusts (eg, enforcement, perpetuity rules, tax advantages).

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 Act primarily governs the definition and regulation of charities in England and Wales?
   1. Trustee Act 2000
   2. Law of Property Act 1925
   3. Charities Act 2011
   4. Inheritance Act 1975
2. Which of the following is NOT a requirement for a trust to be charitable?
   1. It must have a charitable purpose recognised by law.
   2. It must be for the public benefit.
   3. It must have specifically named individual beneficiaries.
   4. Its purposes must be exclusively charitable.
3. A trust established to provide scholarships for the children of employees of a specific large company generally fails which test for charitable status?
   1. Certainty of intention
   2. Exclusively charitable purpose
   3. Public benefit (due to personal nexus)
   4. Charitable purpose recognition

Introduction

When establishing a trust, the settlor may intend for it to benefit specific individuals (a private trust) or to achieve a particular purpose. Trusts for purposes can be divided into non-charitable purpose trusts and charitable trusts. Charitable trusts hold a special status in law due to their aim of benefiting society. This article focuses on the definition and essential characteristics of charitable trusts as outlined by the Charities Act 2011 (CA 2011), which is the primary legislation governing charities in England and Wales. Understanding these requirements is essential for advising clients and for success in the SQE1 assessments.

The Definition of a Charity

Section 1(1) CA 2011 defines a charity as an institution which is established for charitable purposes only and falls under the control of the High Court concerning charities. For a trust to be recognised as a charity, it must satisfy three key requirements:

1. It must have a purpose that falls within the list of recognised charitable purposes (s 3 CA 2011).
2. It must be for the public benefit (s 4 CA 2011).
3. Its purposes must be exclusively charitable.

Key Term: Charity An institution established for purposes recognised by law as charitable, which benefits the public and is subject to the High Court's jurisdiction regarding charities.

Requirement 1: Charitable Purpose

A trust cannot be charitable unless its purpose is recognised as charitable under the law. Section 3(1) CA 2011 provides a list of thirteen descriptions of purposes. These include well-established heads such as:

• The prevention or relief of poverty.
• The advancement of education.
• The advancement of religion.
• The advancement of health or the saving of lives.
• The advancement of citizenship or community development.
• The advancement of the arts, culture, heritage or science.
• The advancement of amateur sport.
• The advancement of human rights, conflict resolution or reconciliation.
• The advancement of environmental protection or improvement.
• The relief of those in need (due to youth, age, ill-health, disability, financial hardship etc.).
• The advancement of animal welfare.
• The promotion of the efficiency of the armed forces or emergency services.
• Other purposes recognised under existing charity law or analogous to the listed purposes.

This list is comprehensive but not exhaustive, allowing for the recognition of new charitable purposes that align with the spirit of the Act.

Requirement 2: Public Benefit

Simply having a purpose listed in s 3(1) CA 2011 is not sufficient; the purpose must also be for the public benefit (s 4 CA 2011). The concept of public benefit involves two aspects:

1. Identifiable Benefit: The purpose must provide an identifiable benefit or benefits. The benefit must be clear and related to the charity's aims. Any detriment or harm resulting from the purpose must not outweigh the benefit.
2. Benefit to the Public or a Section of the Public: The benefit must be available to the public at large or a sufficient section of the community.

Key Term: Public Benefit The requirement that a charity's purpose must provide an identifiable benefit to the public in general or a sufficiently large section of it, without undue restrictions.

Determining whether the 'public aspect' is met can depend on the specific charitable purpose.

• Personal Nexus Test: For most charitable purposes (excluding the relief of poverty), if the potential beneficiaries are defined by their relationship to a specific individual or entity (e.g., employees of a particular company, members of a specific family), the trust is generally considered private and fails the public benefit test (Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297).
• Poverty: Trusts for the relief of poverty are treated more leniently regarding the public aspect. A trust for one's 'poor relations' can be charitable, provided the individuals are not named.
• Fees: Charities charging fees (e.g., independent schools, care homes) must ensure their services are accessible to a sufficient section of the public. If high fees effectively exclude those of modest means, the charity might fail the public benefit test unless it makes adequate provision for the less well-off (e.g., scholarships, bursaries) (R (Independent Schools Council) v Charity Commission [2011] UKUT 421 (TCC)).
• Religion: Religious trusts generally satisfy the public aspect if worship or activities are open to the public, or if the adherents mix with the wider community. Closed or contemplative religious orders with no public interaction may fail the test (Gilmour v Coats [1949] AC 426).

Requirement 3: Exclusively Charitable Purpose

A trust must be established for exclusively charitable purposes. If a trust has both charitable and non-charitable purposes, it will generally fail as a charity unless the non-charitable purposes are merely incidental to the main charitable aim.

Key Term: Exclusively Charitable Purpose The requirement that a charity must only have purposes that are legally recognised as charitable, with no non-charitable purposes unless they are purely incidental.

• Political Purposes: Trusts whose main purpose is political (e.g., advocating for a change in law, supporting a political party) cannot be charitable (McGovern v Attorney General [1982] Ch 321). However, engaging in political activities that are ancillary to achieving a charitable purpose (e.g., campaigning related to poverty relief) is generally permissible.
• Mixed Purposes: If a trust includes both charitable and non-charitable purposes, and the trustees can choose between them (e.g., a trust for 'charitable or benevolent purposes'), the trust will fail for not being exclusively charitable (Chichester Diocesan Fund v Simpson [1944] AC 341). Severance may sometimes be possible if the funds for charitable and non-charitable purposes are clearly delineated.

Worked Example 1.1

A wealthy individual leaves £1,000,000 in their will to trustees 'to provide educational bursaries for the children of the employees of my company, Tech Giant Ltd'. Tech Giant Ltd employs 50,000 people worldwide. Is this likely to be a valid charitable trust?

Answer: This trust is unlikely to be valid as a charity. Although the advancement of education is a recognised charitable purpose, the trust likely fails the public benefit requirement. The beneficiaries are defined by their personal connection (employment relationship) to a specific entity (Tech Giant Ltd). Following Oppenheim, this creates a 'personal nexus' that prevents the group from being considered a sufficient section of the public, regardless of the large number of potential beneficiaries.

Characteristics and Advantages of Charitable Trusts

Charitable trusts possess several distinct characteristics and enjoy significant advantages compared to private trusts:

1. Enforcement: They are enforced by the Attorney General (representing the Crown as parens patriae) and regulated by the Charity Commission, rather than by specific beneficiaries.
2. Certainty of Objects: They are not required to have the same certainty of objects as private trusts. A trust for 'the relief of poverty in London' is valid, even though specific beneficiaries are not ascertainable.
3. Perpetuity: They are exempt from the rules against perpetuity that apply to private trusts, meaning they can potentially last forever.
4. Cy-près Doctrine: If the original charitable purpose becomes impossible or impractical, the court or Charity Commission can apply the funds cy-près (as near as possible) to a similar charitable purpose, preventing the trust from failing completely.
5. Tax Advantages: Charities benefit from substantial tax reliefs, including exemptions from income tax, capital gains tax, and inheritance tax on donations and assets used for charitable purposes.

Exam Warning

A common error is to confuse the requirements for charitable status. Remember that all three elements – charitable purpose, public benefit, and exclusive charitable purpose – must be present. Also, be mindful that the public benefit test can apply differently depending on the specific charitable head being considered (e.g., poverty vs education).

Key Point Checklist

This article has covered the following key knowledge points:

• A charitable trust must be for a purpose recognised as charitable under the Charities Act 2011.
• The trust must satisfy the public benefit requirement, which has two elements: identifiable benefit and benefit to the public or a sufficient section thereof.
• The 'personal nexus' test often prevents trusts for employees or family members (except for poverty relief) from being charitable.
• Fee-charging charities must ensure their services do not unduly exclude the poor.
• A charitable trust's purposes must be exclusively charitable; political purposes or significant non-charitable objects will invalidate it.
• Charitable trusts are enforced by the Attorney General/Charity Commission, are exempt from the beneficiary principle and perpetuity rules, and benefit from tax advantages and the cy-près doctrine.

Key Terms and Concepts

• Charity
• Public Benefit
• Exclusively Charitable Purpose