Guidance

Annex iii: approved charitable investments and loans

Updated 27 March 2024

1. Introduction

1.1 When looking at the qualifying expenditure of a charity HMRC considers not only the direct charitable payments a charity makes, but also the nature of the investments and loans made by the charity.

1.2 Sections 511 and 514 Corporation Tax Act (CTA) 2010 and sections 558 and 561 Income Tax Act (ITA) 2007 describe the types of investments and loans that are ‘approved charitable investments’ and ‘approved charitable loans’. An investment or loan which is not accepted as falling within one of the definitions mentioned will be regarded as non-qualifying expenditure (see Annex ii.

2. Approved charitable investments

2.1 Section 511 CTA 2010 (for charitable companies) and section 558 ITA 2007 (for charitable trusts) list the 12 types of investments that are accepted as qualifying investments. These can be summarised as follows:

• any investment in a charity common investment fund, common deposit fund or similar scheme
• any interest in land (unless it is held as a security or a guarantee for a debt)
• shares or securities of companies listed on a recognised stock exchange
• units in a Unit Trust Scheme
• shares in an Open-Ended Investment Company
• bank deposits — other than deposits made as part of an arrangement under which the bank makes a loan to somebody else (such as back to back loans)
• certificates of deposit
• any loan or other investment made for the benefit of the charity and not for the avoidance of tax (whether by the charity or any other person)

2.2 The final category above (any loan or other investment made for the benefit of the charity) (type 12) relates, in part, to loans that are made by a charity as investments. However, a charity may make loans for purposes other than investment. Section 514 CTA 2010 and section 561 ITA 2007 provide rules in respect of these other types of loan.

3. Approved charitable loans

3.1 If a loan is not an investment it will be a qualifying loan if it’s:

• a loan made to another charity for charitable purposes only
• a loan to a beneficiary of the charity, and made in the course of carrying out the purposes of the charity
• money placed in a current account at a bank (other than as part of an arrangement under which a loan is made by a bank to some other person)
• any other loan made for the benefit of the charity, and not for the avoidance of tax (whether by the charity or another person)

4. Interpretation of ‘for the benefit of the charity’

4.1 There are limited ways in which charities may apply their funds; broadly they may either apply them in carrying out their charitable objects or they may invest their funds to generate income to fund their charitable activities. So, investments and loans made by charities may be made for the:

• financial benefit of the charity, to generate income or gains to enable the charity to carry out its objects
• charitable benefit of the charity — carrying out its charitable objects

HMRC has long held the view that an investment or loan must be either for financial benefit or for charitable benefit. However, HMRC increasingly recognise that charity trustees need greater flexibility in making investment decisions and a rigid distinction is no longer necessarily appropriate.

4.2 HMRC accepts that in considering whether an investment or loan has been made for the benefit of the charity a broad view should be taken of how the charity benefits. This does not mean that ‘anything goes’. Trustees must be able to justify their investment and loan making decisions and demonstrate how the loan benefits the charity. HMRC may ask to see evidence of the trustees’ decision-making process and the information considered as part of that process.

4.3 Type 12 investments include loans made by way of investment as well as other investments not included in type 1 to 11 investments. This kind of investment will normally be made to generate a flow of income or capital appreciation to enable the charity to deliver its charitable objectives. Where this is the case ‘for the benefit of the charity’ is most likely to mean for the financial benefit of the charity. In this sort of case HMRC would expect to see evidence of trustees having made a properly considered investment decision. This would include taking properly qualified, and preferably independent, advice as necessary, the seeking of a commercial rate of return in relation to risk, taking reasonable steps to limit the charity’s overall exposure to risk including securing loans where possible, and consideration of available alternatives.

4.4 There’s no one test of commercial soundness and each case must be viewed on its own facts. Where the loan is an investment loan, HMRC will normally accept it’s for the financial benefit of the charity where it:

• carries a commercial rate of interest which is paid and actively pursued
• is adequately secured
• is made under a formal written agreement which includes reasonable repayment terms

In considering the individual elements above HMRC will look at the arrangement in the round. For example, does the rate of return reasonably reflect the security and repayment terms? Have the trustees made proper enquiries into the credit worthiness of the borrower and do the terms reflect that? Have the agreed terms of the loan been applied in practice?

4.5 As noted above, HMRC will take a broad view of how an investment benefits a charity. For example, a commercial investment might yield a highly advantageous return for the charity, but be so contrary to the charity’s objects that it cannot be properly considered to be for the benefit of the charity. Conversely, an investment may yield a relatively modest rate of return, but may help directly carry out the charity’s objects. In such a case the trustees may be able to demonstrate that overall, there is an acceptable level of benefit to the charity for the amount invested.

4.6 A loan not made as an investment does not need to provide a financial benefit and would normally only be ‘for the benefit of the charity’ if it’s made for the charitable benefit of the charity. HMRC would expect to see evidence that the trustees had given proper consideration to how the loan would carry out the charity’s objects. This would include taking account of the balance between public benefit and any private benefit to the recipient of the loan. However, a broad assessment has to be made of the benefit provided by such a loan and if it provides some financial return this should be taken into account. Section 514(3)(d) CTA 2010 and section 561(3)(d) ITA 2007 apply only to loans not made as investments.

4.7 Guidance published by The Charity Commission for England and Wales identifies a distinction between ‘Financial Investments’ and ‘Social Investments’.

4.8 Investments recognised by the Charity Commission as Financial Investments should be investments in the strict sense — funds invested to generate a flow of income or gains to enable the charity to carry out its objects. Where an investment is a financial investment HMRC would expect trustees to be able to demonstrate that the investment was made for the financial benefit of the charity.

4.9 The Charity Commission guidance recognises that a charity can take an ethical approach to its financial investments.

Ethical investments

4.10 Ethical investments may also be known as sustainable or socially responsible investments. While these are still financial investments and must be demonstrably made for the financial benefit of the charity they’re likely to be made in accordance with the charity’s values and ethos and may yield a lower return than the best performing commercial alternatives. Trustees may be able to demonstrate benefit to the charity, despite this lower performance, by reference to the positive effect on the charity’s objects, the avoidance of conflict with those objects or the impact of the investment decision on supporter perceptions.

4.11 Programme Related Investments are not investments in the strict sense. While such investments may take the form of subscribing for shares in a company they’re not made with a view to generating a flow of income or gains to carry out the charity’s objects. Indeed, such investments may not offer any realistic prospect of a commercial investment return. Instead, these investments are properly viewed as application of funds to further the purposes of the charity. Where the trustees are able to demonstrate that proper consideration has been given to such an investment and how it’s expected to further the charity’s objects HMRC is likely to accept that it’s been made for the benefit of the charity.

4.12 Mixed Motive Investments. Some charity investments will be made on terms that deliver insufficient financial return for them to be accepted as financial investments. At the same time they deliver insufficient charitable benefit to be accepted as being programme related investments. However, trustees may be able to demonstrate that, taken together, the combination of financial return and carrying out of charitable objectives is sufficient for the investment to be made for the benefit of the charity. For example, trustees of an overseas development charity may decide to invest £25,000 in a fair trade tea production and marketing venture. The agreed rate of return on the investment is only 2% at a time when the trustees could reasonably expect 5% from conventional investment of that amount.

However, the trustees are able to demonstrate that the social benefits in the target population are such as would have justified an application of charitable funds to the value of £15,000. Taking account of this, a 2% return on the amount invested looks more reasonable and HMRC would be likely to accept this as being for the benefit of the charity.

4.13 The Charity Commission no longer uses the terminology of ‘Programme Related Investments’ or ‘Mixed Motive Investments’ because the activities described by these terms are likely to be covered by the charity law definition of Social Investment. Read Investing charity money: guidance for trustees (CC14) for more information. However, we recognise that these terms may continue to be used by charities and will be relevant even though they are likely to come within the definition of Social Investment.

5. Investments and loans to trading subsidiaries

5.1 Many charities have subsidiary companies that pass their taxable profits to the parent charity. Where an investment, including an investment loan, is made in such a subsidiary company, the charity’s unlikely to be able to obtain normal security for the investment. In such cases HMRC may ask to see the business plans, cash-flow forecasts and other business projections which informed the charity’s decision to make the investment.

6. Probity of investments and loans

6.1 When deciding whether to make an investment charities should bear in mind the requirements of charity law relating to:

• objectivity in the selection of investments
• the need to avoid undue risk or speculation
• the need for a proper spread of investments

6.2 Charities should also of course bear in mind the scope of the requirements of the Trustee Act 2000 as well as their own investment powers as set out in the charity’s governing document

7. Qualifying loans and investments are not expenditure

7.1 An investment or loan is not an item of expenditure since it’s not paid away irrevocably. An approved charitable investment or loan is not, therefore, an item of charitable expenditure to be taken into account for any restriction of relief computation. However, an investment or loan which is not approved is non-charitable expenditure under the provisions of section 496 CTA 2010 and section 543 ITA 2007 for the purposes of restricting a charity’s tax exemptions.

8. Loans to participators or associates of participators of close companies

8.1 Many charitable companies are close companies for tax purposes (that’s under the control of 5 or fewer participators). Subsidiaries of such charities will also be close companies. In these cases liability under the provisions of Section 455 CTA 2010 can arise when the company lends or advances money to:

• a participator in the company (for example, one of the directors or governors or guarantors)
• an associate of a participator (for example, spouse and civil partner)

9. Other relevant rules

9.1 Where, before 1 April 2013, charities have made loans to major donors and people connected to them, or made investments in businesses connected to such persons, they’ll need to take account of specific rules governing transactions with substantial donors.

9.2 Where, on or after 1 April 2011, charities have entered into arrangements that are likely to provide a significant financial advantage to a donor, or persons connected to a donor, they’ll need to consider the impact of the Tainted Charity Donations rules introduced in Finance Act 2011.

10. Reporting requirements

Where a charity receives a tax return

10.1 If a charity is satisfied that all of its investments or loans fall within the 1 to 11, and its non-investment loans are charitable loans, it should tick the box on its tax return for a:

• company return — box E26 of the charity supplementary page (CT600E)
• trust return — the question ‘were all investments qualifying investments and were loans made qualifying loans within s558 and s561 ITA 2007?’on the charity supplementary page (SA 907)

10.2 If the charity is satisfied that any other investment or loan still qualifies as an approved investment or loan because it’s made for the benefit of the charity and not for avoidance of tax, there are 2 options:

• tick the box on the appropriate return page (as indicated above) and be prepared to make a formal claim in respect of the relevant investment if requested by HMRC
• or make a formal claim with the return — charitable trusts only may make a separate claim

No tax return received

10.3 A formal claim for determination of whether an investment or loan qualifies as an approved charitable investment or loan can be made at any time after the investment or loan has been entered into. There’s no provision in the Taxes Acts for HMRC approval to be given in advance of transactions being carried out.

Claims

10.4 Where a charity wants to make a formal claim or if a formal claim is requested by HMRC that claim must be in writing and must specify:

• the nature of the investment (such as, loan and shares)
• the amount involved
• the accounting period in which the loan or investment was made
• whether the claim is made under section 511 CTA 2010 or section 558 ITA 2007 (both type 12 investments) or section 514 (3)(d) CTA 2010 or section 561 (3)(d) ITA 2007 (both charitable loans)

It’s also helpful if any other relevant information is supplied at the time of the claim, for example, details of the terms of a loan, copy of any loan agreement or prospectus.

Where a charity has been required by HMRC to give a company tax return for the accounting period to which the claim relates and the claim can be made by either including it in, or by amending, the return, then the claim must be made.

Unapproved investments or loans

10.5 Where a charity has purchased investments or entered into loan arrangements that do not satisfy the requirements to be approved investments or loans, the total of such loans or investments must be entered for a:

• company return — box E27 of the charity supplementary pages CT600E
• trust return — box 7.38 of the charity supplementary page