Whether you are a trustee of an established charity or looking to create a new charity, it is advisable to consider whether a Charitable Incorporated Organisation (CIO) would be a suitable structure for you.
At Elite Law Solicitors, we can provide expert advice and assistance in relation to Charitable Incorporated Organisations. If you are considering whether this type of structure is right for you get in touch today and book a free initial consultation by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
What is a Charitable Incorporated Organisation?
The Charitable Incorporated Organisation structure was introduced in 2013 with the intention of making things simpler for charitable organisations and their trustees. The key features of CIOs and their corresponding benefits are as follows:
How is a Charitable Incorporated Organisation governed?
Charitable Incorporated Organisations each have a governing document called a “constitution”, which sets out how the CIO will operate – much like the Articles of Association for a company. Ultimate responsibility for the Charitable Incorporated Organisation rests with the “charity trustees”, who are like the trustees and directors of a charitable company.
CIOs will also always have a membership but there are two ways the membership can be constituted (see ‘Which type of CIO is right for you?’ below).
How do Charitable Incorporated Organisations compare with other incorporated structures?
Charities can operate under other incorporated charitable structures that would also give the advantages of limited liability and property ownership. The most obvious alternative is a company limited by guarantee (“CLG”).
When charities set themselves up as CLGs, the incorporated entity will be both charitable (i.e. all its objects must be charitable) and a company. This structure has a potential advantage in that, unlike a Charitable Incorporated Organisation, the company continues to exist even if it is not (or no longer) charitable.
The main drawbacks of using a CLG rather than a Charitable Incorporated Organisation are that a CLG is regulated by both Companies House and the Charity Commission, and the company has an obligation to make annual returns to both organisations. There are also additional legal requirements under company law, such as in relation to company membership.
As such, if a charity is currently operating under an unincorporated structure, or you are setting up a new charity, a Charitable Incorporated Organisation is likely to be a better option for the charity than a CLG.
Which type of Charitable Incorporated Organisation is right for you?
If you would like your church to operate as a Charitable Incorporated Organisation, you need to consider which type of Charitable Incorporated Organisation is right for you. In every Charitable Incorporated Organisation, there are two sets of decision makers:
The members of the Charitable Incorporated Organisation
Members are responsible for decisions such as amending the constitution and winding up of the Charitable Incorporated Organisation. The functions of the members of a CIO are similar to those of shareholders of a private company.
The trustees of the Charitable Incorporated Organisation
Trustees are responsible for the general control and management of the charity.
The Charity Commission has created two types of Charitable Incorporated Organisation varying according to who the CIO members are:
Foundation CIO
Under this type of Charitable Incorporated Organisation, the voting members of the Charitable Incorporated Organisation and the charity trustees are the same group of people. This means the charity trustees will be the ones responsible for making all the key decisions although, for some decisions, they will be acting in their capacity as Charitable Incorporated Organisation members.
Association CIO
This type of Charitable Incorporated Organisation has a wider voting membership, with some Charitable Incorporated Organisation members who are not trustees.
The benefits of becoming a Charitable Incorporated Organisation
This section outlines the main advantages of having an incorporated structure.
Liability of the Charitable Incorporated Organisation trustees
The first advantage relates to the liability of the Charitable Incorporated Organisation trustees and members for the actions of the charity.
Charitable trusts and unincorporated associations are not regarded as a single legal entity and so they need people to do things on their behalf, such as entering into contracts with employees or suppliers. These people are usually the charity trustees.
When a charity trustee agrees a contract on behalf of the charity, they are personally liable to fulfil the obligations set out in those contracts, although they are entitled to use the charity’s assets to do so (to the extent that the assets are sufficient). However, the other trustees (and possibly also the members of the charity if they have approved the trustee’s decision) may also be held to be personally liable.
If the charity’s assets are insufficient to meet those contractual obligations, the personal assets of charity trustees (and the members) are potentially at risk. It may or may not be the case that insurance will cover this risk.
By contrast, when the trustees of a Charitable Incorporated Organisation sign a contract in the name of the charity, neither the charity trustees nor the members of the charity are personally liable under the contract. It is only the CIO as a corporate entity that is liable and so only the assets of the CIO that are at risk. Provided the trustees have acted in accordance with their duties, they are not personally liable.
The benefit of limited liability for CIOs covers not only contractual obligations, but also other kinds of liabilities (e.g. personal injury claims connected with events on the charity’s premises, or claims brought by a member of the public under discrimination laws) that are not already covered by insurance. For charities operating through an unincorporated structure, all the charity trustees are potentially personally liable for the actions of the charity in relation to these kinds of claims.
There is also a practical advantage in clarifying that contracts and obligations rest with the CIO, rather than with the trustees personally. It means those obligations remain with the CIO even when there is a change of trustees. In an unincorporated charity, it can be unclear who is responsible for carrying out commitments that have been made on the charity’s behalf, when those were agreed by former trustees.
Property ownership
The second advantage concerns property ownership. As a corporate entity, a Charitable Incorporated Organisation can own property in its own name.
A charity does not have this ability if it operates through an unincorporated structure, and will need to use property trustees to hold property on behalf of the charity.
A charity operating as a charitable trust or an unincorporated association can have individual people acting as property trustees, in which case a minimum of two property trustees is required, or it can use a trust corporation to hold property.
This often means that there is a separate “property holding charity” or “property trust” which may technically be a distinct charity in its own right. This has important implications for understanding the different parties involved in the CIO process.
If the charity uses individual property trustees, the charity will need to go through a conveyancing process every time those individuals need to be changed, e.g. when a trustee dies or wishes to retire. Failure to do this can lead to situations where the charity has property trustees in other parts of the country who no longer have any contact with the charity, or who may become incapacitated or die without the charity being aware of the position. It can also lead to difficulties with how the property is registered at the Land Registry.
If the property is held by a trust corporation, the charity will need to consult with the trust corporation whenever it wants to enter into a mortgage, grant a lease or sell the property. The requirement to consult with the trust corporation can cause delays because the trust corporation is not part of the charity and will need to take time to familiarise itself with the matter.
None of these complexities arise if the church operates as a Charitable Incorporated Organisation. The property is simply held in the name of the CIO. There is no need to deal with the appointment and resignation of the trustees whenever there is a change in the trustee body and there is no need to involve an external trust corporation.
Governance
Setting up a Charitable Incorporated Organisation is also often an opportunity to clarify some key decisions in the life of the charity. Although this may take a significant investment of time and discussion, many charities find that the process enables them to refine some of the principles on which they operate, and to articulate them more clearly for the benefit of everyone in the charity and of those who will join it in the future.
Preliminary considerations to becoming a Charitable Incorporated Organisation
This section will help you think through some preliminary issues related to becoming a Charitable Incorporated Organisation.
Registered charity number and name
For charities that are already registered, you need to be aware that setting up a Charitable Incorporated Organisation will involve being given a new charity number. Therefore, once the CIO has been set up, you will need to prepare amended stationery, including issuing new Gift Aid forms.
When an existing charity is setting up a CIO it has the freedom to retain its existing name or to adopt a new name, provided that the proposed name is not the same as the name of another charity.
CIOs have to state their registered name at their registered premises, and on all official documents, including on formal communications and stationery, legal documents, fundraising materials and on their website. If your income is above £10k per annum, you are also required to include your registered charity number in documents that relate to fundraising and finance, so it is probably easier to include it alongside the registered name in all relevant documents. In addition, if the CIO does not have “CIO” or “Charitable Incorporated Organisation” in its name, it needs to state that it is a CIO.
Long-term benefits vs short-term costs
The long-term advantages associated with CIOs described above need to be weighed against the short-term costs and time required to set up a Charitable Incorporated Organisation.
There is no automatic process for a charity currently operating as an unincorporated association or as a charitable trust to convert to a CIO. Becoming a CIO involves setting up a new charity and then transferring all of the assets, liabilities, and people from the existing charity to the new CIO. The amount of work required to achieve this will vary greatly depending on the circumstances of your charity.
The amount of work required to achieve this will vary greatly depending on the circumstances of your charity, but a general overview of the steps required is set out in the Appendix.
It will take a significant commitment of time and money, on the part of the charity and its trustees, to work through these steps carefully. It is a major project in the life of the charity, and you will need to think of it in terms of a long-term investment to put the charity’s governance and constitutional arrangements on a sound footing for the future.
An established charity seeking to become a CIO should be able to go through the whole process in around 12 to 18 months. For new charities, a typical timescale would be around 3 to 8 months.
These timescales depend on the specific issues that arise for your charity, the amount of time the charity is able to devote to the project, and how quickly the Charity Commission is able to respond.
Other incorporated structures
As above, if the charity is currently operating under an unincorporated structure, a Charitable Incorporated Organisation may be a better option for the church than a CLG. In January 2018, a new regulatory regime came into force allowing charitable companies to convert directly to CIO status, retaining their existing charity number and bank accounts. Direct conversion is relatively quick and therefore likely to make sense for charities operating as CLGs (although there may be issues for charities which have mortgages or charges registered over their assets).
The process will be more complex if the charity wants to review some key parts of its constitution, however, such as its charitable purposes, or the benefits that trustees are allowed to receive.
There may be cost savings in converting to a CIO for CLGs with an annual income of less than £250,000. A CIO with annual income below this amount can prepare accounts on the basis of the receipts and payments method, whereas all companies must use the accruals method. Charities may find that the costs of having an independent examination are cheaper if the accounts are prepared on the basis of receipts and payments rather than accruals. You should take advice from an accountant if this is something you are considering, to ensure that the receipts and payments methods is appropriate for your charity.
Should you close the existing unincorporated charity?
One further question is whether to close down your current, unincorporated charity once everything has been transferred to the Charitable Incorporated Organisation, or whether to retain it for legacy purposes. This does not apply to new charities because, in these cases, there is no existing charity.
There is currently a gap in the law so that, in some cases, legacies made to the original charity will fail if the charity does not still exist on the death of the donor, even if the merger of the original charity with the CIO has been registered with the Charity Commission. The issue only arises for legacies drafted in a particular way. This issue is, however, addressed in the Charities Act 2022 but the new provisions are not expected to come into force until the end of 2023.
Until that new legislation comes into effect, charities that receive significant funding through legacies will need to consider whether there is risk that a legacy could fail. We can help you to assess this risk. Given the existence of the Register of Mergers and the forthcoming legislation, in many cases the best course of action will be to close down the existing charity and then make an announcement advising that people who have made legacies to the charity should consult their legal advisers to ensure that their will has been drafted so that the legacy will go to the CIO.
Next steps in becoming a Charitable Incorporated Organisation
Broadly, there are three phases of incorporating as a Charitable Incorporated Organisation. There may be property-related issues that need to be dealt with in parallel to the work involved in these three phases. If that is the case, we will provide you with a separate fee estimate for the property-related work.
How much will it cost?
We work hard to make specialist legal advice accessible to charities. Each charity is different and we provide a bespoke service to ensure that the needs of your particular situation are addressed.
We are not providing an “off the peg” solution, because we do not think that puts the charity in the best position for the long term. Our aim is to help provide a structure that reflects how the charity operates in practice and which takes account of the challenges that you may face in the future. We will therefore provide a fee estimate for your charity which takes account of your specific instructions and the documents that you provide to us. We want to give you a realistic idea of the costs in conversation with you about your specific requirements.
We have broken down the Charitable Incorporated Organisation process below and provided an outline of the possible costs involved for each phase. We have then set out some examples of issues that are likely to affect the costs.
It is important to note that, at each stage, we will be able to establish more firmly the scope of the work involved in the remaining stages. Part of the aim of carrying out the initial review is to give you a clearer sense at the outset of what issues will need to be addressed and what our estimate of costs is for doing that work. There may be circumstances which mean one or more phases cost more than the rough estimates below. We aim to identify any of these issues as early as possible. We will then update you at the end of each phase (or sooner if appropriate).
Our time is charged at hourly rates and our fee estimates are based on the amount of time we think it will take to complete the work you have asked us to carry out. We assume that we will need a maximum of one or two rounds of correspondence with you for each stage. If additional input is required, the matter is more complex, or there are significant delays in the church progressing the matter, it may require more time, which will increase the costs.
As a very rough guide, a charity that has no property and whose incorporation process is very straightforward might expect to pay costs of around £3,000 – £5,000 plus VAT for the CIO process. A charity that has numerous properties and significant complexities in how it operates (or in relation to its previous history) might expect to pay something more like £10,000 – £20,000 plus VAT to become a CIO and transfer the properties into it.
Property Costs
As highlighted above, being able to hold its own property is one of the reasons a charity might choose to set up a Charitable Incorporated Organisation. The charity’s properties are often your most valuable assets and moving them into the CIO is an important part of the process. If they are not moved into the CIO, it could have adverse implications for charity. For example, it may prevent you from closing down the unincorporated charity, and/or leave the CIO in limbo as to its legal right to occupy the premises.
In our experience, however, dealing with a charity’s property as part of the CIO process can be complex. We will therefore provide a fee estimate for your charity which takes account of your specific instructions and the documents that you provide to us. We want to give you a realistic idea of the costs in conversation with you about your specific requirements.
You can decide whether you would like us to undertake a full property review, and at what stage. In some cases, for example if your resources are very limited, and the property issues look like they are going to be complex and do not need to be resolved immediately, you may decide not to take advice on the property issues beyond Phase 1. You could simply exclude the property from the transfer of the charity’s assets to the CIO for the time being.
That decision would in turn affect how our Private Client team goes about setting up the Charitable Incorporated Organisation at Phase 2, and what work is required at Phase 3. This can increase the costs for those phases of the CIO process, as we will still need to understand how the charity can use the property if it is not transferred to the CIO. The trustees may also decide later on that they do want to transfer the property after all, which can lead to delays and duplication of work.
As a general rule, we therefore recommend that we undertake a full property review and that you do so at as early a stage as possible, so that the charity’s property can also be dealt with properly and in the most cost-effective way in Phase 3.
Fee estimates by phase
Phase 1 – Initial Review
The initial review encompasses advice about how the charity’s existing governing documents and structure will affect the remainder of the Charitable Incorporated Organisation process. It includes a brief overview of the properties that relate to the charity, as described above.
We will provide an estimate of costs for the initial review in our engagement letter. For existing charities, they are likely to be in the region of £1,200 – £3,000 plus VAT.
Examples of issues that will mean the costs of the initial review are higher rather than lower include:
- There are multiple properties that relate to the charity and which are held for its benefit.
- Documents that relate to either the charity or its property are missing, incomplete or very difficult to read, or there is a large volume of documentation.
- Some of the trustees are paid and it is unclear whether those payments are currently authorised.
We ask for the funds that relate to our estimate of costs for Phase 1 on account at the beginning of the process. This is a down-payment towards the work involved in Phase 1.
For new charities we ask for an initial payment of £150 plus VAT. We may or may not need to carry out an initial review, depending on whether the charity has already started operating in any form, and whether you have any kind of constitutional document in place already.
Phase 2 – Establishing the Charitable Incorporated Organisation
At Phase 2 we will begin work towards setting up the Charitable Incorporated Organisation, and continuing to progress any issues that relate to the properties the charity uses.
There may be questions or further information that we need from you in response to the initial review in Phase 1, before we can progress to Phase 2. We will identify those separately and they are not included in the figures we have given below.
The work involved in this stage includes drafting the CIO constitution, and producing the application to register the CIO at the Charity Commission.
The costs involved in setting up the CIO are usually in the region of £1,000 to £2,300 plus VAT. These will be higher if:
- You have lots of comments and questions on the draft documents and/or registration application, and we need multiple conversations or rounds of correspondence to address those points.
- You would prefer us to use your current constitutional documents and amend them to fit with the CIO process.
- You need significant help from us with preparing the accompanying documents required for registration of the CIO.
- The Charity Commission raises substantial queries on the registration application.
Alongside setting up the Charitable Incorporated Organisation, we will also carry out a full property review, if one is required. This may not be necessary at all, if the charity has no property that is held on its behalf, or if the position in relation to the property is very straightforward. If we have suggested a full property review, however, the additional costs could be anywhere between £500 and £2,500 plus VAT.
Phase 3 – Transfer of assets to the Charitable Incorporated Organisation from the existing charity
By the time we reach the stage of transferring the charity’s assets to the Charitable Incorporated Organisation, we will have already set out for you the steps and fees involved. It is almost impossible to provide you with an outline of those issues in a generic booklet like this. By way of example, however:
- The transfer of staff and assets where no property is involved will probably cost in the region of £850 – £1,500 plus VAT.
- The transfer of a freehold registered property that is clearly held for the benefit of the charity by a trust corporation/identifiable holding trustees will be in the region of £800 – £1,000 plus VAT.
- Transfer of a property that is not already registered at the Land Registry (where the transfer means a first registration is required) is likely to cost at least £2,000 plus VAT.
There are a significant number of variables that will affect the costs for this stage of work, such as:
- If an amendment of the governing documents and/or an application to the Charity Commission is required to enable the Charitable Incorporated Organisation to use the property as intended, or to permit the church to transfer its other assets to the CIO.
- Where the charity has a trading company and the shares are being transferred to the CIO.
- Where the charity holds leasehold property – the landlord’s consent to the transfer is needed (often the landlord may also require their costs to be covered), and/or there may be other complications arising from the drafting of the lease.
- If there is a mortgage on the property and the mortgage lender requires the charity to enter into a new mortgage.
- In liaising with the trust holding company or property trustees and their legal advisers. Our outline of costs above assumes that any separate property trustees are broadly in agreement with the decision to convert to a CIO, and with the instructions of the church’s trustees in relation to the CIO’s governance and constitution.
- Where it is unclear who holds the property for the benefit of the charity, or the trustees cannot be traced, or have died, and we need to apply to the Charity Commission and/or the Land Registry.
- If the original deeds for the property or properties are not available.
- The costs and fees that are payable to third parties (such as Land Registry fees).
There are ways in which you can help to keep costs down. We have estimated the costs above presupposing that the client will make their correspondence with us as efficient as they can.
We know that it is important to be able to contact your lawyer, but we also want to keep your costs to a minimum, insofar as we are able to do so.
What else do you need to consider?
We have set out below some of the more common issues that arise when we carry out CIO incorporations.
This is not an exhaustive list but, if you think any of these issues apply to your charity, it would be really helpful if you make that clear in your instructions to us.
Do your existing governing documents prevent you from setting up a Charitable Incorporated Organisation or place restrictions on the type of CIO that you were able to set up?
This is only likely to be an issue if the charity owns a building which is held under a property trust that is prescriptive about how the charity has to organise itself and, even in those cases, a CIO can usually be set up in a manner that is consistent with the requirements.
Is the church part of a multi-employer pension scheme?
Some charities are or have been part of a multi-employer pension scheme. This is where a number of different employers contribute towards the same scheme that is administered by a trustee on behalf of all the employers.
With this type of scheme, certain events (known as “cessation events”) can trigger an obligation on the charity to make a payment towards any deficit within the scheme. One of the most common events is ceasing to have any more employees participating in the scheme. A change of legal structure may also be regarded as a cessation event. Therefore, if the charity is or has been part of a multi-employer pension scheme, you need to take advice from a pensions lawyer as to how the CIO project will affect the charity’s liabilities under the scheme.
If the church has a mortgage, how much will the lender charge for transferring the loan agreement to the charity?
If the charity has a mortgage, the consent of the lender will be required if you are intending to transfer the land to which the mortgage relates to the ownership of the Charitable Incorporated Organisation. Additionally, in some cases the consent of the lender will be required for setting up the CIO at all and it may be necessary to enter into a new mortgage agreement.
It is unlikely a lender would want to prevent the charity from setting up a CIO, but the lender may well make a charge for granting its consent and you need to factor this into your decision on whether the benefits of setting up a CIO will outweigh the costs.
Does the new Charitable Incorporated Organisation intend to obtain a mortgage?
Charitable Incorporated Organisations remain relatively new and it may take time explaining the status to other parties such as banks and funders, especially if a CIO needs to borrow funds at an early stage. This potential disadvantage can be pre-empted by starting discussions at an early stage of planning the CIO with potential lenders. Please contact us if you wish to discuss this further.
If the charity has a lease, how much will the landlord charge for transferring it to the Charitable Incorporated Organisation?
If your charity owns its property by way of lease, we will check whether the consent of the landowner is required to transfer the lease to the Charitable Incorporated Organisation. It is unlikely that the landlord could completely withhold consent, but they may charge a significant sum for granting consent. You should find out what these costs would be before committing to setting up a CIO.
If the charity carries out services for public bodies, what impact will setting up a Charitable Incorporated Organisation have on the contracts?
Some charities carry out services on behalf of public bodies, e.g. running homeless shelters or forms of social care under a contract with the local authority. These services are often carried out under long-term contracts and when the contract comes to an end the charity will need to compete against other potential service providers to continue providing the service. There are two key issues here for churches providing these services.
First, if the charity becomes a CIO during the current term of a contract, will the public body agree to transfer the contract to the new CIO for the remainder of the term? You would need to liaise with the public body to address this matter. We can help with drafting the legal documentation to transfer the contract.
Second, when the public body retenders the contract and the charity submits a bid as a CIO, will the public body take into account experience gained by the charity when it operated under a different legal structure or will the change in legal structure lead the local authority to see the charity as a brand-new entity with no previous experience? Government guidance indicates that public bodies should take the previous experience into account, but they may not always follow that guidance. Therefore you should check with the public body whether such experience would be considered.
How we can help with Charitable Incorporated Organisations
How we can help with Charitable Incorporated OrganisationsAt Elite Law Solicitors, all work undertaken relating to Charitable Incorporated Organisation is overseen by the Jane Whitfield, who heads up our Private Client Deparment.
Jane is a highly accomplished solicitor who brings a unique blend of commercial application and strong technical, academic and research skills gained in the City and in highly regarded regional practices.
Jane is a full member of STEP and a qualified Trusts & Estates Practitioner, as well as a fully accredited member of Solicitors for the Elderly.
Jane can provide expert advice and assistance in relation to Charitable Incorporated Organisations. If you are considering whether this type of structure is right for you get in touch today and book a free initial consultation with Jane by calling 0800 086 2929, emailing info@elitelawsolicitors.co.uk or by completing our Free Online Enquiry Form.
