{"id":36748,"date":"2017-05-03T17:04:00","date_gmt":"2017-05-03T17:04:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/?p=36748"},"modified":"2026-05-26T18:47:53","modified_gmt":"2026-05-26T18:47:53","slug":"restricted-funds-what-are-they-and-what-are-the-pitfalls","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-uk\/insights\/restricted-funds-what-are-they-and-what-are-the-pitfalls","title":{"rendered":"Restricted funds: What are they and what are the pitfalls?"},"content":{"rendered":"\n

For the purpose of this article, we will refer to both as \u2018charities\u2019. Such assets are referred to as \u2018unrestricted funds\u2019.<\/p>\n\n\n\n

In some cases, special arrangements are made in respect of certain charitable assets and, in the event that those arrangements amount to a separate charitable trust being established, a \u2018restricted fund\u2019 is created. These special arrangements are usually a result of donor requests but also come about where a charity fundraises for a specific purpose.<\/p>\n\n\n\n

It is worth noting that charities can allocate certain assets towards a particular use for administrative purposes and that such an allocation will usually only create a separate fund in administrative terms as opposed to a separate trust being established by law, such funds being a charity\u2019s \u2018designated funds\u2019. The distinction between designated funds and restricted funds is that the charity can simply re-allocate the proposed use of the assets in a designated fund (provided that such action is in the best interests of the charity) whereas departing from the special arrangements that apply to restricted funds is a more complicated process (see further below).<\/p>\n\n\n\n

Restricted funds are commonly sub-divided into \u2018restricted income funds\u2019 and \u2018endowment funds\u2019, broadly: the term \u2018restricted income funds\u2019 is used for funds whose use is restricted by a particular purpose and where the assets must be used in a reasonable period from their receipt (e.g. where a charity is given money by a third party further to a bequest where the bequest specifies that the monies are to be used to purchase certain assets for which the charity has a need);<\/p>\n\n\n\n

\u2018endowment funds\u2019 are funds whose restrictions relate to the capital element of the assets in question. Endowment funds can be further sub-divided into:<\/p>\n\n\n\n

(a) \u2018permanent endowment funds\u2019, where there is no power granted to the charity in the terms of the trust to convert the capital element of the asset to income. An example of this would be where a third party makes a bequest that monies are left to a charity on the basis that the capital sum is invested and that only the income is used for the charity\u2019s purposes; and (b) \u2018expendable endowment funds\u2019, where there is a power granted to the charity in the terms of the trust to convert either all or part of the capital element of the asset to income. An example of this would be where a capital sum of money is left to the charity to be spent in its entirety on the charity\u2019s purposes but where there is no requirement that the capital be spent in a reasonable period.<\/p>\n\n\n\n

RESTRICTED FUNDS \u2013 WHAT ARE THE PITFALLS?<\/h3>\n\n\n\n

The main pitfall associated with restricted funds is the charity and its trustees\/members being subject to liabilities arising from being in breach of trust as a result of not adhering to the trusts of the relevant restricted fund in question. To explain, whenever a new trust (such as a restricted fund) is created, the charity trustees in question become subject to a further set of duties and obligations in respect of that new trust in addition to the duties and obligations that they hold towards the larger charity.<\/p>\n\n\n\n

Unless a specific power for the donor to consent to the assets in question from being freed from the relevant restriction (or giving the charity any discretion in respect of the same) has been incorporated into the trusts of the restricted fund in question, the charity can only deviate from the terms and conditions of the trusts in certain instances as specified by charity law (these \u2018legal flexibilities\u2019 are set out below). In the event that a charity deviates from the terms of the trusts of a restricted fund and does not act within the legal flexibilities below then such action is likely to be unlawful.<\/p>\n\n\n\n

The legal flexibilities referred to above include:<\/p>\n\n\n\n