What is the nature and definition of a charitable trust?
Parliament and the English courts of law have, for many centuries, looked upon the trustees of charitable trusts as being labourers in the same vineyard as the state itself. Accordingly charitable trusts have been given three important advantages over other trusts (known as “private trusts”):
Rule against perpetuities
(1) The “rule against perpetuities” does not apply to charities. This is a rule which prevents land and other property becoming inalienable because of the “dead hand” of the past (mortmain). The common law does not allow property to be tied up by means of a private trust for longer than “a life-in-being plus 21 years”. (However, since the passing of the Perpetuities and Accumulations Act 1964, it has been possible to select a fixed period of not more than 80 years.) Charitable trusts are free from this rule because the degree of public benefit implicit in the nature of such a trust outweighs, or at least counterbalances, the injury to the public interest caused by long-term or perpetual mortmain.
“Certainty of objects” rule
(2) The rule known as “certainty of objects” does not apply to charitable trusts. This is a rule which invalidates a private trust if it is not possible to identify, with a sufficient degree of certainty, the beneficiaries of that trust. For example, a private trust would be in danger of being declared void if it provided for property to be held on trust for “my friends”(*) — and such a trust would undoubtedly fail if it required equal division of all the property among such a vague class of persons. However, the essential nature of a charitable trust is that it brings about a public benefit, over and above the benefit it may bestow on individual persons, and there is no requirement for individual beneficiaries to be ascertainable. It is the charitable purpose which is the object of the trust. Thus it is permissible for a testator to leave property to trustees for “the relief of poverty” without closely defining any intended class of persons to be benefited from this disposition of his property and without naming any particular registered charity as the object of his gift. Indeed, even if the testator does for some reason name (in vain) a particular charity, it may be possible for the courts to substitute another charity which “as closely as possible” (cy-pres) achieves the testator’s intended purpose, eg where the first-named charity has ceased to exist (and there is no doubt about the testator’s general charitable intentions). Whereas certainty of objects is vital in private trusts, a too close attention to narrowly defined classes of persons may deprive an otherwise laudable trust of its badge of “general public benefit” and it will fail as a charitable trust for that reason. But a charitable trust which does not identify any beneficiaries with sufficient certainty for them to come forward to enforce that trust will, none the less, be a valid and enforceable trust because the Attorney-General will be able to bring (or to respond to) legal proceedings in the name of the public at large.
Tax benefits
(3) Charitable trusts receive considerable tax benefits, such as exemption from income tax on rents and other investments; recovery of tax deducted at source in the case of dividends or paid by the covenantors of “four-year covenants”; exemption from corporation tax, capital gains tax and inheritance tax; and a 50% reduction in rates on any premises occupied wholly or mainly for charitable purposes (including administrative offices, workshops, and premises used for estate management purposes on land held for charitable purposes: Aldous v Southwark London Borough Council [8] 1 WLR 1671). There is, however, no general exemption from VAT for charities.
The first of the above three advantages was clearly the most important reason for keeping a close eye on charitable trusts when land was the most important source of political power and almost the only form of property which produced income. However, now that trustees are ready, willing, and sometimes duty-bound to sell land to acquire other investments, or to sell other investments to buy land, the apparent inalienability of property held upon trust is no longer a bar to development of real property or a restriction on the operation of the free market. (Nevertheless, it is not uncommon to find land which has been held by the Church of England since time immemorial or held by public schools for many centuries.)
It is quite clear, therefore, that the third advantage (tax concessions) has become the most important reason why, in modern times, the definition of charitable trusts is closely confined and sternly policed.
Having made this point, a conceptual argument for being more flexible can now sensibly be put forward. This is because the activities of central and local government have increased since 1914 and, correspondingly, more activities of private benefactors may reasonably be seen as alleviating the state from duties it would otherwise have to perform, and as reducing the expenditure from public funds which the state would otherwise have to make.
The Recreational Charities Act 1958 may be put forward as an example of this more flexible attitude. The proposals for reform in that Act found favour with Parliament after there had been discouraging decisions in the courts relating to sports grounds and other recreational activities.
What is a charity?
There is no statutory definition of the word “charity”. The Charitable Uses Act 1601 (known as the Statute of Elizabeth) contained a preamble (not part of the legislative body of the Act) which set out the categories of charitable objects as understood by the (Elizabethan) Parliament of 1601. This preamble has been tremendously influential. The charitable purposes which it listed were as follows:
The relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars in universities; the repair of bridges, ports, havens, causeways, churches, sea-banks, and highways; the education and preferment of orphans; the relief, stock, or maintenance for houses of correction; the marriage of poor maids; the supportation, aid and help of young tradesmen, handicraftsmen, and persons decayed; the relief or redemption of prisoners or captives; the aid or ease of any poor inhabitants concerning payment of fifteens, setting out of soldiers and other taxes.
The Act of 1601 was repealed by the Mortmain and Charitable Uses Act 1888, but section 13(2) of that Act recognised the value of the preamble and continued to make reference to it. The Charities Act 1960, however, expressly repealed any legislative existence of the preamble and declined to give any statutory definition for the concept of a charity. Nevertheless (and as Parliament must well have understood) the preamble had already influenced generations of judges and, effectively, had become part of English case law. Thus the most convenient definition of a charity under English law is Lord Macnaghten’s condensement of the preamble, as set out by him in Commissioners of Income Tax v Pemsel [1] AC 531, at p 583:
“Charity” in its legal sense comprises four principal divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community …
In applying this definition to a will or to an inter vivos trust deed or to any other declaration of a trust, it becomes essential to bear in mind that a valid charitable trust will not be created if the wording used by the testator (or the settlor) creates the possibility (not necessarily the probability) of the trustees’ using all or some part of the property for non-charitable purposes.(+) Thus, in Attorney-General of the Bahamas v Royal Trust Co [6] 3 All ER 423 the Privy Council had to interpret words (in a will) which purported to create a gift on trust “for … the education and welfare of Bahamian children and young people”. It was held that the word “welfare” was a “word of the widest import” and was capable of embracing “almost anything which would lead to the enhancement of the quality of life” (per Lord Oliver). Accordingly, the gift was held to be too widely worded to create a charitable trust and could not be interpreted in the sense “educational welfare”. This case must be contrasted with cases like Re Best [1904] 2 Ch 354, where the phrase “charitable and benevolent” was, in effect, interpreted to mean “charitably benevolent”.
It is as well, therefore, that the writer of a will or other trust instrument always bears in mind the fact that the word “and” is not always interpreted conjunctively, and the word “or” is not always interpreted disjunctively, and that at least one Chancery Judge has expressed concern about the number of misinterpreted testators he is likely to meet on “the other bank of the Styx”.
(*) Re Barlow’s Will Trusts [9] 1 WLR 278 is recognised to be an exceptional case.
(+) For the various methods of creating a trust, or transferring an equitable interest under a trust, see “Mainly for Students”, 284 EG 1503, December 12 1987.
