Charitable Trusts: Law, Purposes, and Fiscal Benefits

Posted on Nov 30, 2025 in Philosophy and ethics

How Charitable Trusts Function

Charitable trusts are purpose trusts, meaning property is held for a specific purpose, and there is no human beneficiary.

Requirement: Charitable Purpose

Charities Act 2011: Public Benefit Requirement

The purpose must be ‘charitable’ and, under the Charities Act 2011, must be for the public benefit.

Fiscal Advantages of Charitable Status

  • Exempt from Inheritance Tax (IHT).
  • Exempt from tax on investments.
  • Exempt from income tax.
  • Gift Aid (allows the charity to reclaim the basic rate of tax on gifts).

Statutory Definitions (Charities Act 2011)

  • Section 1: Defines Charity.
  • Section 2: Defines Charitable Purpose.
  • Section 3: Defines Purposes.

Charitable Purposes under S.3(1)

S.3(1)(a) – The Prevention or Relief of Poverty

Case Law Defining Poverty

Poverty is defined broadly in case law:

Re Coulthurst (1951)

This case concerned widows and orphaned children of deceased officers of a bank (workers). Poverty means being “going short” of what one would normally have (e.g., food, clothes), rather than absolute destitution.

Re Saunders Trust (1954)

A gift left for the working classes and their families failed. Merely being working class is insufficient; it does not automatically imply poverty. If the gift had followed the precedent in Re Young (for the distressed working class), it would have been valid.

Re Niyazi’s Will Trust (1978)

A Turkish Cypriot left money for a working men’s hostel. The area in Cyprus where the hostel was being set up was poor, and the word ‘Hostel’ implied working people who were “going short” of accommodation.

Joseph Rowntree Memorial Trust

Relief must address a genuine need. The prevention of poverty includes preventing those who are poor from becoming poorer, and preventing people who are not poor from becoming poor.

S.3(1)(b) – The Advancement of Education

IRC v McMullen (1981)

Lord Hailsham defined education as: “a balanced and systematic process of instruction, training and practice…” containing both spiritual, moral, mental, and physical elements.

Incorporated Council of Law Reporting v Attorney General (1972)

The Council sought charitable status. It was argued that publishing law reports lacked educational purpose and merely allowed lawyers to make money. The Court of Appeal disagreed, granting charitable status, as the Council disseminated the reports for the public benefit.

Education is Not Political

McGovern v Attorney General (1982)

Campaigning to change the law is considered a political purpose, not research or education. Although Human Rights are now covered by statute, changing the law remains a political purpose.

Students’ Unions

Attorney General v Ross (1986)

Student unions are central to the educational purpose of an institution; therefore, they too acquire an educational purpose.

S.3(1)(c) – The Advancement of Religion

Thornton v Howe (1862)

Publications of the writings of Joanna Southcott, who claimed to have been pregnant by the Holy Ghost, were held to be for the public benefit. The court noted that the root of the word ‘Publication’ is public.

Varsani v Jesani (1999)

Religion does not have to be monotheistic (e.g., a Hindu sector). Monotheism is the belief in a single, all-powerful God, as opposed to religions that believe in multiple gods. Hinduism is a religion that believes in more than one god.

Religion Includes (S.3(2)(a))

  • Belief in one God.

The Public Benefit Test (S.2(b))

A trust must be for the public benefit, especially due to the exemption from tax.

Traditional Presumptions (Now Abolished)

Traditionally, certain charitable purposes were presumed to satisfy the public benefit test:

  1. Education
  2. Poverty
  3. Religion

Note: This presumption is no longer the case, as confirmed by S.4(2) & S.4(3) of the Charities Act 2011. Public benefit must now be demonstrated for all purposes.

Case Law on Public Benefit

Re Foveaux (1895)

A gift was left to societies against animal testing. Justice Chitty found the gift charitable based on a subjective test: if the person giving the gift thinks it is charitable, then it is. (Note: This subjective test is largely superseded by the Charities Act 2011 requirement for demonstrable public benefit.)

Oppenheim v Tobacco Securities Trust Co Ltd (1951)

A gift was left for the education of children of British American Tobacco workers. The trust failed because if there is a personal nexus (a link based on employment or family), there is no public benefit.

IRC v Educational Grants Association Ltd (1967)

80% of the funds were allocated for the personal employees of a company, establishing a personal nexus. Therefore, the trust failed the public benefit test.

Distinctions: Private vs. Public Purpose Trusts

Private Purpose Trusts

  • Most are void for having no beneficiary (the beneficiary principle).
  • Purpose trusts can exist for the personal benefit of the settlor (e.g., trusts of imperfect obligation).

Public (Charitable) Purpose Trusts

  • Do not need a human beneficiary to be valid.
  • A charitable trust can last forever (exempt from the rule against perpetuities).
  • Must carry some element of public benefit.

The Cy-près Doctrine

Cy-près is an ancient doctrine meaning ‘as near as possible’. It allows either the court or the Charity Commission to change the purpose of a charitable trust if the original purpose has become outdated, old-fashioned, or completely impossible to carry out.

Key Functions of Cy-près

  1. Keeps Property for Charity: The alternative to changing the purpose is declaring the gift ineffective. Ineffective gifts usually result back to the donor (resulting trust), or their next of kin. Cy-près stops this from happening.
  2. Applied for Purposes ‘Next Nearest’: The doctrine ensures the funds are applied for purposes ‘next nearest’ to the donor’s original intention.
  3. Respecting Donor’s Wishes: The court is restrained; it cannot simply do whatever it likes with the property.

Initial Failure

Initial failure occurs when the gift fails before it is even applied to a charity.

  • Gift to a closed charity.
  • Gift for an impossible purpose.
Re Wilson (1913)

A testator set up a school, but the terms were too complex to carry out so the gift failed.

Avoiding Initial Failure: Institutional Amalgamation

Re Faraker (1912)

A will maker left a legacy to the Hannah Bay Charity, a charity for the benefit of widows in London. This charity had amalgamated with another charity to create one single charity. It was held that the gift had not failed, as the new charity encompassed the objects of the first charity (they were similar). When two or more charities join together, the gift will generally not fail.

Re Stemensons

This principle applies only to trusts, not for companies.

Subsequent Failure

Reforming the purpose of established charities is covered by S.61 of the Charities Act 2011.

  • An established charity runs out of money.
  • An established charity discovers that its purposes have become impossible.
  • An established charity thinks that its purposes have become useless.
Re Wright (1954)

No general charitable intention is required for subsequent failure. The gift is kept within the charity whether or not the testator had a general intention.

Statutory Provisions for Cy-près

  • S.62(1)(a): Fulfilment (Purpose fulfilled or surplus funds).
  • S.62(1)(c): Merger (Charities merge).
  • S.62(1)(e): No Useful Purpose (Purpose has ceased to be useful).
  • S.63: Unknown Donor (Special rules apply when the donor is unknown).