Gavin McEwan explains how new regulations in Scotland enable charities to free-up restricted funds in the Charity Finance December issue.

New Scottish regulations which came into force on 1st November 2012 allow charities to reorganise restricted funds in order to free up charitable assets to be used to better effect. The Charities Restricted Funds Reorganisation (Scotland) Regulations 2012 provide a simple method of varying or removing conditions attaching to restricted funds without the need for a formal court procedure.

Restricted funds arise in a number of ways. Most frequently, they come from gifts or legacies made for specific purposes. Unlike designated funds, where a charity itself has earmarked funds for particular work, restrictions imposed by donors become a permanent feature of the donation or legacy, unless the donor agrees later to the restriction being amended or removed. Where a donor is no longer able to consent – through death or incapacity, or because the donor simply cannot be traced – charities may be left with a legally binding condition which could only be removed by the courts.

The benefit of the 2012 regulations is to allow charities to apply directly to the Office of the Scottish Charity Regulator (OSCR) to have restrictions lifted or altered. In order to benefit from the OSCR procedure, a charity must demonstrate that one or more of the reorganisation conditions has been met.

These conditions include: that some or all of the purposes of a restricted fund have been fulfilled or provided for in other ways; that they can no longer be given effect; that they only provide a purpose for part of the fund; or that the restriction has ceased to be charitable or to provide an effective and efficient use of the funds.

If one or more of the reorganisation conditions applies, the charity must also satisfy OSCR that the reorganisation will result in funds being applied to better effect, for charitable purposes, and consistent with the charity's constitution. OSCR must also be satisfied that attempts have been made to obtain the donor's consent.

Application under the new regulations must be advertised and in the case of large restricted funds (assets over £1m or gross annual income over £100,000) that means advertisement in a newspaper and on OSCR's website. Smaller finds only need to advertise on OSCR's website.

Helpfully, the Scottish Government added provisions for very small restricted funds (those with no land or building or private company shares, with gross annual incomes under £1,000). In those very small cases, OSCR has the ability to waive entirely the advertisement requirements.

Representations from members of the public may be made and OSCR will weigh up such representations (whether in favour of or against an application) before making its final decision.

The new rules provide an ideal opportunity for charity trustees to carry out an audit of their restricted funds and to consider whether those funds could, through an application to OSCR, be put to better charitable effect.

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