Issue of loans by charities

An area where trustees of grant making charities may face confusion is in issuing loans to beneficiaries as an alternative to making grants.

Following the introduction of a statutory power for charities to make social investments, the Charity Commission guidance “Charities and investment matters: a guide for trustees” (CC14) details this alternative method to provide finance to beneficiaries via Programme Related Investments (PRI).

Broadly speaking, the aim of a PRI is to use a charity’s assets to directly further its aims.

When making a loan as an alternative to a grant, it is expected that the loan will be repaid, potentially with some interest and thus enable the charity to expand its work with other beneficiaries.

From a governance point of view, documentation of any loan arrangements entered into is critical from the discussion stage to the point of final repayment.

This will mean that any discussions held should be detailed in the meeting minutes, with a clearly documented thought process of (but not limited to):

  1. Why a loan is being issued as an alternative to a grant
  2. How the issue of the loan will further the charity’s aims
  3. Whether there will be any benefit to a private individual and how this can be minimised
  4. Practical ways to exit from the arrangement should it cease to further the charity’s aims

The CC14 guidance contains a checklist (annex 2) to guide trustees through the decision making process for making PRIs.

Once a decision is reached, the terms of the loan should be documented via a loan agreement which should be signed by both a representative of the charity and a representative of the beneficiary, detailing:

  • Use of funds
  • Rate of interest payable
  • Timescale and terms of repayment

There is no legal obligation for a charity to seek advice when determining whether to make a PRI. However, trustees should consider whether they feel that they are confident in their abilities to make the decision as there will always be some degree of reputational risk over decisions made regarding distribution of funds.

It should be noted that a charity can only make a PRI which supports its charitable aims and failure to do so may result in the income used to fund the PRI becoming taxable (HMRC guidance on approved charitable investments and loans).

If you would like to discuss this blog in more detail please email Sarah Ollerton or call us on 01772 821 021.