Land deals with charities are often more complicated than the usual property transactions with a non-charitable body. When considering such a transaction the first step is to look at the impact of the Charities Act 2011 (the “2011 Act”) on the proposed deal. It is equally important to bear in mind the individual trustees’ obligations and responsibilities as well as the tax implications.
Exempt or non-exempt
When considering the impact that the 2011 Act will have on a land transaction with a charity, the first step is to ascertain whether the charity is an exempt or non-exempt charity. Most charities are classified as non-exempt, meaning they are subject to statutory restrictions on their dealings with land.
An exempt charity is a charity that is supervised by a government or other public authority and therefore is not subject to the same statutory restrictions on their land dealings. However, the charity trustees of exempt charities must still fulfil their general duties when dealing with charity land and they must include prescribed statements in their transaction documents.
Dispositions
A wide range of dispositions of land by a charity fall within the scope of the 2011 Act; the most commonly affected transactions are transfers, surrenders and the grant of leases.
Section 117(1) provides that no land may be conveyed, transferred, leased or otherwise disposed of by a non-exempt charity without an order made by the court or by the Charity Commission. Obtaining an order can be avoided if the charity trustees follow a set procedure. For the majority of dispositions of land the relevant procedure is set out in section 119. Less onerous requirements (under section 120) apply on the grant of a lease for seven years or less as these transactions are considered less risky.
Section 119 procedure
Broadly speaking, section 119 requires that the charity trustees:
• Obtain and consider a written report from a qualified surveyor who must be instructed by the trustees and act exclusively for the charity on the transaction. The content of the report is prescribed by the Charities (Qualified Surveyors’ Reports) Regulations 1992;
• Advertise the proposed disposition for such period and in such manner as the surveyor has recommended; and
• Decide that they are satisfied that the terms on which the disposition is to be made are the best that can reasonably be obtained for the charity.
Section 120 procedure
If the disposition is the grant of a lease for a term of seven years or less, the trustees must still obtain advice on the proposed transaction from a qualified person. However, in contrast to section 119, there is no requirement for that advice to be given in writing, or for the person advising to be a qualified surveyor. In reality a surveyor may well be the best type of person to advise the charity.
Section 122(3) certificate
Regardless of which procedure applies, it needs to be undertaken before the charity trustees enter into any agreement for purchase or any agreement for lease. As a result, it will not be possible to make any contract or agreement for lease conditional on the charity complying with these procedures. Additional time will be needed to allow the charity to comply with the 2011 Act.
Furthermore, the trustees must confirm their compliance with the 2011 Act in the actual document of transfer. A prescribed form of certificate is contained in section 122(3).
Obtaining a mortgage
Mortgaging of land by charities is also restricted under the 2011 Act. Section 124 provides that land held by a non-exempt charity may not be mortgaged or charged without an order from the court or the Charity Commission.
Similar to the procedure on dispositions, an order is not required if the trustees obtain and consider written advice on the mortgage before entering into it. The matters that need to be covered in the advice depend on the nature of the mortgage. The advice should be given by a person who the charity trustees reasonably believe is appropriately qualified to advise the charity given their experience of financial matters.
It is possible for such advice to be given by a person in the course of their employment as an officer or employee of the charity, thereby enabling the trustees to use existing expertise within the organisation.
Section 125(2) certificate
The lender should ensure that the mortgage document itself states that the land is held by or on trust for a charity and confirm whether the charity is exempt or non-exempt. If the charity is non-exempt the mortgage document must go on to state whether the charity has obtained an order from the court or the Charity Commission or that they have complied with the statutory procedure to obtain advice.
Acquisitions
In contrast, when charities are acquiring land they are not curtailed by statute in the same way that dispositions and mortgages are restricted and the trustees need only confirm that, on acquisition, the land will be held by, or in trust, for a charity (or Section 122(8) certificate). However, individual charity trustees would be well advised to obtain advice and in particular ensure that they fully comply with their duties as trustees to the charity.
Tax implications
Tax advice on charity acquisitions is also vital. There is no blanket exemption from tax when a charity buys a property and the two main areas that will require special consideration by the trustees are VAT and SDLT.
VAT
A charity acquiring a property or taking a lease of it can disapply a vendor’s or landlord’s option to tax for a building or a part of a building if the building or relevant part thereof is intended for use by the charity “solely” for a relevant charitable purpose and not as an office. Having disapplied the option, no VAT can be charged to the charity on any consideration or rent payable. This is a good result for the relevant charity, but could be very disadvantageous for the vendor or landlord, which could incur a clawback of VAT previously recovered and may therefore look to increase the price of the property.
SDLT
Charities can avoid paying SDLT if the property acquired is to be used in the course or furtherance of the charity or as an investment from which the profits are applied for charitable purposes; and the acquisition has not been entered into for the purposes of avoiding SDLT.
If these conditions cannot be fully met, it is still possible for the charity to claim relief from SDLT if certain other conditions can be satisfied. Relief is also available to a charity that acquires a property jointly with another person. However, the relief can in certain circumstances be clawed back, for example if the charity ceases to be established for charitable purposes.
New guidelines
The Charity Commission has recently published new guidelines on the distinction between “reasonable and prudent tax planning” and arrangements likely to constitute tax avoidance. The guidelines confirm that it is appropriate for charity trustees to engage in reasonable and prudent tax planning but that they will risk scrutiny and potential investigation if they engage in tax arrangements that exploit tax legislation artificially. This guideline can be found at www.gov.uk/government/publications/chairty-tax-reliefs-guidance-on-chairty-commisson-policy.
Why this matters
Where a section 122(3) certificate appears in an instrument of transfer there is a presumption in favour of the person who acquires an interest in the land that the facts were as stated in the certificate. Therefore, if the charity trustees have given a false certificate, the disposal will be valid in the purchaser’s favour unless the transaction amounts to a fraud on the charity by the purchaser.
However, where a certificate has not been given (and should have been) the purchaser receives a lower level of protection. In those circumstances the transaction is only valid in favour of someone who, in good faith, acquires an interest in the land.
The accepted view is that a transaction will not have been completed in good faith if the purchaser knew, or should have known, that the 2011 Act had not been complied with.
This is not just limited to first purchases: the same test applies to subsequent purchasers of land previously owned by a charity. It is therefore essential that a purchaser’s due diligence considers the steps that should have been taken on that original purchase from the charity and that evidence of compliance with the 2011 Act is obtained. Where the purchaser fails the good faith test the validity of the transaction will be determined by general law. This in effect means that the transaction will either be void or will remain at risk of being set aside by the court.
The same principles will apply on failure to comply with the statutory procedures regarding mortgages.
In addition, if the charity trustees have not acted lawfully in the best interests of the charity they may be in breach of their duties as a trustee. A charity trustee who acts in breach of their duties may be personally liable to compensate the charity for any loss caused as a result of that breach.
Getting the tax position correct is vital. Charities need to ensure that as many of the donations received by them are applied to their respective objectives and are not lost to poor tax planning.
Further reading
Charities Act 2011, sections 117 to 129
Schedule to the Charities (Qualified Surveyors’ Reports) Regulations 1992 (SI 1992/2980)
VAT on Construction, Land and Property, Scammell M, (Bloomsbury Professional)
Alex Barnes is a tax partner and Emma McPeake is an associate solicitor at Irwin Mitchell LLP
