Legacies to merged charities and the Charities Act 2022

The Charity Commission's register of merged charities was introduced by the Charities Act 2006, along with several provisions dealing with gifts to merged charities. Combined, the provisions were intended to help preserve legacies to charities that had, between the date of a Will and the death of a testator, transferred their assets somewhere else and been wound up.

The intention was that, once a merger had been registered, any later gifts to the charity that had ceased to exist would be treated automatically as if they had been made to the newly merged body. However, largely because of a drafting flaw, this wasn't guaranteed to happen, meaning that many charities that had ceased to be active following a merger had to be retained in some form.

Happily, recent changes brought about by the Charities Act 2022 should help to ensure that it will in the future, as well as reducing the need for so-called "shell charities".

Background

Prior to the existence of the register, gifts to merged charities often failed on the basis that the specific charity named in the Will no longer existed and could not therefore receive the gift.

There were (and still are) mechanisms by which the charity's successor body could argue that it ought to receive the legacy instead, but this was often difficult to do – particularly for corporate charities – and involved demonstrating, by reference to the wording of the Will, that the testator intended to benefit a charitable purpose, rather than a particular entity.

It, therefore, became common practice following mergers for the transferring charity to be retained in shell form, thereby ensuring that it continued to exist and was able to collect any legacies it received post-transfer and pass them on to its successor.

The problem with shell charities, however, is that they can be burdensome in terms of administration. They remain subject to the accounting and reporting requirements of the Commission and, if they take the form of companies, Companies House.

The Commission has also been known to purge dormant or inactive charities from its register and, while doing so does not necessarily cause those charities to cease to exist, it does make them more difficult for executors and other interested parties to locate.

Preserving gifts to merged charities – the first attempt

The merger provisions introduced by the Charities Act 2006 applied in respect of what are known as "relevant charity mergers". A relevant charity merger takes place between two or more charities where either:

• One of the charities (the "transferee") receives all the property of the other(s) (in each case a "transferor").
• Both or all of the charities (each a "transferor") transfer their property to a completely new charity (the "transferee").

and each transferor has ceased or will cease to exist on or following the transfer. Any such merger – including the kind of merger that takes place on incorporation – can be registered but, except for those involving a pre-vesting declaration, registration is optional.

The idea was that the relevant charity merger having been registered, any legacies made to a transferor would be deemed to have been made instead of the transferee. However, as originally drafted, the provisions that were meant to preserve gifts to merged charities only worked for gifts that:

• Were expressed as a gift to the transferor; and
• Took effect on or after the date of registration of the merger.

The problem with this came fully to light in a 2012 case Berry v IBS-STL (UK) Ltd, which dealt with a Will in which a testator had left the residue of her estate on trust to be divided equally between six named charities. The Will gave the executors discretion, should any of the charities have ceased to exist by the date of death, to apply that charity's share in favour of one or more different charities of their choosing.

By the date of death, one of the named charities had ceased to exist, having previously transferred its assets to another body. The executors asked the High Court to decide whether they were compelled by the relevant section of the Charities Act to pay the relevant portion of the residue to the new body (which had by then gone into insolvent liquidation) or whether they were free to exercise their discretion under the Will.

The Court found that the section did not apply because the Will had not made a gift to the charity in the first place. As the gift was only made to those of the six charities that existed at the date of death, it was not "expressed as" a gift to the transferor and had never taken effect. The executors were therefore free to apply the gift at their discretion.

The outcome would have been the same had the successor body remained in existence at the date of death, as the original gift would still not have taken effect. In those circumstances, the executors would also have been able to select an alternative recipient, which is not necessarily what the testator would have wanted.

The case, therefore, demonstrated that the provisions of a Will could, in effect, trump the relevant provisions of the Charities Act, even though they were intended to save gifts in such situations. It left charities that were planning to merge without certainty that future legacies would automatically end up with their successors, and the practice of retaining shell charities post-merger therefore continued – somewhat defeating the purpose of the register of mergers.

Preserving gifts to merged charities – the second attempt

The decision in the Berry case did not come entirely as a surprise because, by the date of the judgment, the flaws in the relevant provisions had already been identified.

They were considered as part of Lord Hodgson's 2012 review of the operation of the Charities Act 2006, and later by the Law Commission's review of technical issues in charity law, which led to the enactment of the Charities Act 2022.

Section 33 of the 2022 Act, which came into force on 7 March 2024, amended the provisions of the Charities Act 2011 that deal with gifts to merged charities – in particular, those contained in section 311. The provisions still apply only to relevant charity mergers (the definition of which has not changed) but, as amended, they now operate to save any gift that:

• Would have taken effect as a gift to the transferor if the transferor had been in existence.
• The date on which that gift would have taken effect is a date on or after the date of the registration of the merger.

If these conditions are met, the gift takes effect as if it had been made to the transferee. This will apply to any legacies where the death of death is on or after 7 March 2004, irrespective of the date of the Will and the date on which the merger was registered.

The amended provisions solve the Berry problem because they mean that, if a charity that has been wound up following a merger would have received a legacy had it continued to exist, the legacy will be treated as if it was made to the successor body. This will be true even if the Will says that the charity must continue to exist if it is to benefit – as was always the intention.

The Law Commission believes that the amended provisions strike a fair balance between respecting testamentary freedom and ensuring that gifts do not lapse simply because a charity has merged. Testators wanting to exclude the effect of the provisions will be able to do so if they wish by, for example, stating that the gifts are conditional on the named charities not having merged. They will, however, need to do so deliberately, rather than potentially by accident, as was previously the case.

Not quite the end for shell charities

The fact that the gap in the charity merger provisions has now effectively been filled will not, in itself, make shell charities a thing of the past – not least because the amended provisions will not save gifts that have already failed, and so shell charities that have been retained to accept gifts from long-running estates that came into being prior to that date will need to be kept in existence.

There are other reasons for retaining shell charities too – it is usually sensible, for example, to retain a shell charity for at least a short time following a merger so that the parties can ensure that everything has transferred as intended, and to give donors time to adjust their giving arrangements.

When legacies are contested there are, of course, many potential outcomes and charities with first-hand experience – particularly those that rely heavily on legacy income – may continue to feel the need to retain a shell charity to cover all eventualities.

But charities that merged some time ago and that have been retaining shells largely as a precaution may decide that the risk of missing out on legacies is now small enough to justify their closure – especially if they have a reasonably clear picture of what legacies they are likely to receive. As the new provisions bed in, therefore, it seems likely that we will see more charities relying on the register of mergers and fewer opting for the shell charity route.

If you have any questions about legacies to merged charities and the Charities Act 2022, please contact Andrew Mackie.