Roman Kubiak, Head of Private Wealth Disputes, and Eleanor Evans, Head of Trusts and Estates Administration, summarise the changes to ex gratia payments in sections 15 and 16 of the Charities Act 2022, which will be brought in later in 2024.
The Charities Act 2022 received Royal Assent in February 2022, and has come into effect on a piecemeal basis. Sections 15 and 16 are due to be implemented later in 2024.
What are ex gratia payments?
Ex gratia payments are payments from a charity’s funds which are made by charities where there is no strict legal requirement to make the payment, but the charity may consider there is a moral obligation. Waiving a right to receive money or property, or transferring charity property other than money, may also be considered ex gratia payments.
We often encounter ex gratia payments when administering deceased persons’ estates or legacies, or dealing with legacy disputes. There might be a scenario, for example, where a person intends to change their will to benefit a particular family member, but dies before doing so. If their estate passes to charity, the family member might feel that the charity should make a payment to them for moral reasons.
If there is a formal legal claim against the estate (such as a claim for financial provision under the Inheritance (Provision for Family and Dependants) Act 1975), any settlement of such a claim would not be an ex gratia payment.
What is the process currently followed for ex gratia payments?
Under the Charities Act 2011, charities can apply to the Charity Commission for permission to make ex gratia payments.
Previously, ex gratia payments required the consent of the court or the Attorney General, as established in Re Snowden (deceased) [1970] 1 Ch 700.
The rationale behind the requirement for permission stems from the duty placed on charities to only use charity funds to further the charity’s purposes. Charities want to avoid any breach of their obligations and having the blessing of the Charity Commission (or the court, or Attorney General), means they can proceed with ex gratia payments without the risk of criticism or other potential ramifications of a breach of their obligations.
That said, seeking permission in every case can be onerous and impractical, particularly when the proposed ex gratia payments are small, and there is a clear moral obligation. Current Charity Commission guidance states that the Commission will not interfere with de minimis (under £1,000) payments being made without consent. This is still, however, fairly restrictive, particularly for larger charities with considerable funds, which may receive numerous ex gratia payment requests.
Any decision to make an ex gratia payment (seeking consent from the Charity Commission if required) must be made by the charity trustees, and the power to make the decision cannot be delegated.
Sections 15 and 16 of the Charities Act 2022
Under sections 15 and 16 it will become possible for charity trustees to make small ex gratia payments where there is a moral obligation. In such cases, the requirement to seek Charity Commission consent will be removed. The definition of what is a “small” ex gratia payment will depend on the charity’s gross income.
| Gross income of the charity in its last financial year | Threshold for ex gratia payment that can be made without permission |
|---|---|
| did not exceed £25,000 | £1,000 |
| exceeded £25,000 but not £250,000 | £2,500 |
| exceeded £250,000 but not £1 million | £10,000 |
| exceeded £1 million | £20,000 |
Charities have the option to restrict or exclude the power to make payments without Charity Commission consent, by including provision in their governing documentation, should they wish. In the case of larger ex gratia payments, permission will still need to be obtained, and all ex gratia payments will still need to appear in the charity’s annual accounts.
Charity trustees will also become able to delegate the power to make ex gratia payments to members of staff; this, along with the introduction of the thresholds, should help to increase operational efficiency in relation to ex gratia payments being made by charities.
Statutory charities
Statutory charities are incorporated or governed by a specific Act of Parliament. It is very difficult for a statutory charity to make an ex gratia payment, as the powers of the Attorney General to authorise ex gratia payments are limited by the confines of the statutes governing the statutory charities.
Under the Charities Act 2022, the rules for statutory charities in relation to ex gratia payments will be made the same as those for non-statutory charities.
Delay in implementation of sections 15 and 16, and exclusion for recipients overseas
It had originally been envisaged that sections 15 and 16 would be implemented sooner, but considerations arose in relation to museums, which were reviewed by the Department for Digital, Culture, Media and Sport. The concern was in relation to museums holding collections where there could be felt to be a moral obligation for the pieces to be returned to the country they had originated from.
Lord Parkinson, Minister for Arts & Heritage, wrote to the chairman of the Charity Commission on 31 January 2024. In the letter, Lord Parkinson set out the outcome of the Department for Digital, Culture, Media and Sport’s review of the provisions in the Act. Essentially, there will be an exclusion from sections 15 and 16 for any ex gratia payment with a recipient outside the UK. If an ex gratia payment by a charity is proposed which means that an object or objects will pass outside the UK, then the rules in section 15 and 16 will not apply and the charity will still need to apply to the Charity Commission for approval of the arrangements that are proposed.
Key takeaways for charities
It would be wise for charities to ensure that they are ready for the implementation of sections 15 and 16. This may include:
- Considering delegation by charity trustees of their decision-making powers regarding ex gratia payment to charity staff.
- Putting in place a framework detailing how any delegation will work in practice and how decisions will be documented.
- Any required updates to governing documents that are needed to detail the delegated powers.
- Training for staff on the new rules and how this will work in practice.
