How would your charity like to offset operating costs and prepare for emergencies? A robust, invested reserve is essential for long-term sustainability. With legacy giving growing steadily in the UK and donors increasingly motivated by Inheritance Tax reliefs on charitable bequests, there has never been a better moment to establish or grow an endowment fund.
In this article:
What is an endowment fund?
An endowment fund is a pool of money donated to a charity, invested to generate income for the organisation. The capital typically remains intact, while the income supports the charity's mission, programmes, or operations. Think of it as your organisation's financial backbone: a safety net that ensures long-term stability.
Endowments are particularly valuable for charities aiming for financial security. By building an endowment, your organisation can create a steady stream of income to weather economic downturns, emergencies, or funding gaps.
Endowments are built from your most committed donors, who often make a commitment through their will or estate plan. Donors can also contribute through outright cash gifts (which may be Gift Aid eligible where the donor is a UK taxpayer), gifts of quoted shares or land (which attract Income Tax and Capital Gains Tax relief), and CAF Charitable Trusts (the UK's closest equivalent to a US donor-advised fund). Legacies, in particular, have long been the primary vehicle for building endowments at UK charities.
The UK legal categories every trustee should know
UK charity law draws a clear distinction between two types of endowment. Understanding this is not just helpful; it has direct implications for trustee duties and regulatory compliance.
- Permanent endowment is defined under the Charities Act 2011. The capital is legally protected and cannot be spent. Trustees are required to invest permanent endowment to produce a return, and they must adopt an investment policy that reflects this duty. The Charity Commission for England and Wales sets out trustee duties in its guidance CC14 (charities and investment matters) and CC38 (expenditure and replacement of permanent endowment). The Charities Act 2022 introduced simplified release routes, including a power for trustees to release small permanent endowments (below £25,000 gross value) and the ability to borrow up to 25% of the value of permanent endowment in defined circumstances. Trustees should verify current provisions directly with the Charity Commission or a specialist charity law adviser before acting.
- Expendable endowment is a board-designated reserve that trustees set aside for long-term investment while retaining the power to spend the capital if needed. It does not carry the same statutory capital-protection rules as permanent endowment but still requires a prudent investment policy.
Charities registered in Scotland are regulated by the Office of the Scottish Charity Regulator (OSCR), and those in Northern Ireland by the Charity Commission for Northern Ireland (CCNI). Both follow the same Charities SORP framework but under their own regulator's guidance.
Key benefits of endowments
- Financial stability: a consistent investment income stream that supports lasting sustainability, independent of annual fundraising cycles.
- Flexibility: expendable endowments allow trustees to access capital strategically during emergencies or significant capital projects.
- Donor engagement: endowments signal to donors that your charity is forward-thinking and built to last. Donors who commit to a legacy gift often deepen their annual giving as well, strengthening your relationship over time.
Types of endowment for UK charities
Not all endowment funds work the same way. Work with your finance team, trustees, and advisers to choose the right approach for your charity.
1. Permanent endowment
- Definition: the capital is permanently protected under the Charities Act 2011 and cannot be spent. Only the investment income is available to support the charity's mission.
- Trustee duty: trustees must invest permanent endowment prudently and in line with an adopted investment policy (Charity Commission CC14). Specific duties around total return apply.
- Example: a donor leaves £1m to a regional music charity as permanent endowment, generating annual investment income to fund artist fees in perpetuity. The capital remains invested and protected.
2. Expendable endowment (board-designated)
- Definition: trustees designate unrestricted reserves for long-term investment. Unlike permanent endowment, the capital may be spent when trustees judge it necessary.
- Flexibility: a useful tool for building a financial cushion without the statutory restrictions of permanent endowment.
- Example: a UK community foundation's trustees designate a significant unrestricted legacy as expendable endowment, retaining the option to draw down capital to support the small-grants programme during a period of reduced grant income.
3. Term endowment
- Definition: both the capital and income are available after a set period or for a specific purpose, in line with the donor's expressed wishes.
- Purpose: often aligned with a particular project or scholarship with a defined spending horizon. If the specified purpose becomes impossible or impractical, trustees may need to apply to the Charity Commission for a cy-pres scheme to redirect the funds.
- Example: a donor leaves £500,000 for a bursary fund at a UK conservatoire, to be spent in full over 10 years supporting students from low-income backgrounds.
How UK charities use endowments in practice
- A regional symphony orchestra establishes a permanent endowment to generate investment income for artist fees, reducing dependence on annual grant applications.
- A UK community foundation uses an expendable endowment as a financial reserve, ensuring it can continue supporting local small grants during an economic downturn without disrupting its grant-making mission.
- A UK independent school receives a term endowment from a donor's estate to fund bursaries for students from low-income backgrounds over a 10-year period.
Starting an endowment: a guide to success
If you are considering launching an endowment, approach it strategically. One effective way is to frame it as a legacy initiative, focusing on long-term impact rather than technical detail. This resonates strongly with UK legacy-giving culture, where donors are motivated by the lasting difference their gift will make.
Tips to get started
- 1. Define your goals. Determine how much you need to raise and for what purpose. Develop a clear gift acceptance policy that sets out the types of gifts your charity will and will not accept. For example, gifts of quoted shares may be welcome (and attract tax relief for the donor), while gifts of art or property may require specialist valuation. This clarity ensures consistency and helps both donors and your team make decisions quickly. Your gift acceptance policy should also meet the expectations of the Fundraising Regulator's Code of Fundraising Practice, which requires that decisions to accept or refuse donations are documented and defensible.
- 2. Engage your trustees. Endowment strategy is a fiduciary decision that belongs squarely with your board of trustees. Educate them on the financial and governance benefits of an endowment and their duties under charity law. The Charity Commission's CC3 guidance ('The essential trustee') sets out trustees' legal responsibilities around long-term financial sustainability. Securing early trustee commitment builds the momentum and credibility needed to approach major donors.
- 3. Create an endowment policy. Set out spending rules, investment guidelines, and donor restrictions. For permanent endowment, refer to Charity Commission CC14 for investment policy expectations, including the total-return duty. Note that charities registered with OSCR or CCNI should follow their own regulator's equivalent guidance. The policy should be written, approved by trustees, and reviewed regularly.
- 4. Launch a campaign. Identify your lead donors: long-term supporters, existing legacy pledgers, and trustees themselves. Develop a segmented prospect list and start with those who already have the deepest connection to your charity's mission. Major donors and board members who make early commitments lend credibility to the campaign and encourage others to follow.
- 5. Collaborate with the right expertise. Endowment management draws on several disciplines. Work with specialist charity investment managers for investment strategy and policy. Consult a specialist charity law firm to ensure your endowment deed and governing documents are correctly structured. For fundraising strategy, the Chartered Institute of Fundraising's Legacy and In-Memory Special Interest Group and NCVO both offer practical guidance. Do not rely on general legal or financial advisers unfamiliar with charity law.
Trustees, regulators, and reporting
Permanent endowment must be disclosed separately in your Trustees' Annual Report and Accounts (TAR) under the Charities Statement of Recommended Practice (SORP). This means donors, regulators, and the public can see how the fund is invested and how income is being used. Expendable endowment designated by the board should also be clearly explained in the TAR. Charities registered with OSCR or CCNI follow the SORP under their own regulator's guidance.
Before setting an endowment investment policy, trustees should seek advice from a specialist charity investment manager experienced in permanent endowment. The Charity Commission's CC14 guidance and CC38 (on expenditure and replacement of permanent endowment) are the primary reference points for England and Wales.
A note on UK giving vehicles for endowments
The most common way UK charities build endowments is through legacies: gifts left in a donor's will. A charitable legacy also reduces the Inheritance Tax rate on the taxable estate from 40% to 36%, provided at least 10% of the net estate is left to charity (see the Charity Tax Group for a clear technical overview). This tax incentive makes legacy giving a compelling conversation to open with major donors.
Other UK giving vehicles include:
- Outright cash gifts: Gift Aid eligible where the donor is a UK income or Capital Gains taxpayer. The charity reclaims 25p for every £1 donated. Note: Gift Aid does not apply where the donor receives a benefit in return (such as event tickets or raffle entries).
- Gifts of quoted shares: the donor pays no Capital Gains Tax on disposal and receives Income Tax relief on the market value. A significant tax incentive for donors holding appreciated shares.
- Gifts of land or property: similar Income Tax and CGT reliefs apply to gifts of land and property to UK charities.
- CAF Charitable Trusts: the UK equivalent of a donor-advised fund, operated by the Charities Aid Foundation. Donors contribute to a CAF Charitable Trust and then direct grants to charities of their choice over time.
Linking to related resources
Considering approaching donors for legacy gifts? Our guide on soliciting endowment gifts walks you through identifying prospects, crafting a compelling case for support, and integrating legacy asks into your annual fundraising programme. For further guidance on legacy fundraising strategy, NCVO and the Chartered Institute of Fundraising both publish practical resources for UK charities.
Final thoughts on endowment funds for UK charities
Building an endowment is not just about securing funds: it is about ensuring your charity's mission thrives for generations. Legacy giving in the UK has grown consistently, and the Inheritance Tax incentive for charitable bequests gives donors a compelling financial reason to consider a gift in their will. By starting small, engaging your trustees early, and working with specialist advisers, you can create a legacy initiative that inspires donors and strengthens your charity's financial foundation for the long term.
The most important step is the first one. Start the conversation with your trustees today.
Zeffy's free fundraising platform helps UK charities run the annual campaigns, events, and appeals that build donor relationships over time, supporting the pipeline of loyal supporters who become your legacy donors. No platform fee, no transaction fee. Ever.
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