Every pound a charity holds sits in a fund, and the fund’s category depends on the terms on which the money was given, not on how the trustees would like to use it. Unrestricted funds can be spent on any of the charity’s purposes, restricted funds only on a narrower purpose set by the donor or appeal, and endowment funds must be invested or kept. Moving money between categories is limited by charity law and must be shown as a transfer in the accounts.
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What are the different types of charity fund?
The Charity Commission’s guidance on reserves (CC19) defines the categories used in accounts prepared under the Charities SORP:
- Unrestricted income funds
- Income the trustees must spend on the charity’s purposes within a reasonable time, at their discretion.
- Designated funds
- Part of the unrestricted funds that the trustees have earmarked for a project or use, without creating any legal restriction. The trustees can cancel the designation.
- Restricted income funds
- Funds subject to specific trusts declared by the donor, or with their authority such as through a public appeal, or created through legal process. They must be spent on the particular purpose, which must still fall within the charity’s objects.
- Expendable endowment
- Capital the trustees have power to convert into income. Until that power is used, there is no duty to spend it.
- Permanent endowment
- Property the charity must keep rather than spend: either assets given for investment, where only the income can be spent, or property that must be used for a particular purpose, such as a building given for use as a school.
How do you decide which fund a gift belongs to?
Look at the words used when the money was given: the donor’s letter, the grant agreement, the will, or the appeal literature. Commission guidance on appeals is direct: if a charity appeals for a specific purpose, it must use the donations only for that purpose. A grant agreement that limits spending to a named project creates a restricted fund; a general grant towards running costs does not.
Designation is different. A trustee resolution to set aside £50,000 for a new roof does not restrict the money legally; it stays unrestricted and the trustees can reverse the decision. Treating a designation as a restriction overstates restricted funds and understates free reserves.
A restriction does not delay recognising the income. FRS 102 paragraph PBE34.68 says the existence of a restriction does not prevent a resource being recognised in income when received or receivable. What delays recognition is a performance related condition, not a restriction on use. The same applies to legacy income left for a stated purpose.
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How are funds shown in the accounts?
The statement of financial activities has separate columns for unrestricted funds, restricted income funds and endowment funds, with a total column and the prior year total. The notes then show the movement on each material fund: opening balance, income, expenditure, gains and losses, transfers and closing balance. The Commission’s completion notes for its accounts templates say any transfers between funds must be detailed in the notes, and designated funds explained separately.
Module 2 of SORP 2026 on fund accounting applies in full to all three tiers. It expands the explanation of fund types and adds a new requirement: fund disclosures must explain the legal powers used to remove a capital restriction, change the purposes of a restricted fund, or let an endowment convert to income. See changes in the new Charities SORP for the other updates.
Fund categories also affect size tests. For accruals accounts, gross income means total income in the statement of financial activities for all funds, excluding receipts of endowment, but including endowment transferred to income funds and available for spending.
When can money be transferred between funds?
Transfers appear on their own line in the statement of financial activities, so that income and spending stay in the fund where they arose. Common reasons include:
- Designating or releasing unrestricted funds. Moving money into or out of a designated fund is entirely in the trustees’ hands.
- Funding a restricted project shortfall. Trustees may choose to cover an overspend on a restricted project from unrestricted funds.
- Surplus appeal money. If an appeal raises more than needed, the Commission’s guidance says to check the appeal wording first. If it includes a secondary purpose, the money must be used for that. If not, the trustees must pass a resolution choosing new purposes, having regard to the original ones, and need Commission authority if the donations involved exceed £1,000. An underspent grant or a specific gift not raised by appeal is handled by contacting the donor.
- Spending permanent endowment. Trustees can spend from a permanent endowment fund worth £25,000 or less by resolution, if satisfied that spending the capital furthers the fund’s purposes more effectively. Above £25,000 they need Commission authority. The test is the market value of the fund, not the amount spent.
- Borrowing from permanent endowment. Up to 25% of the fund’s market value can be borrowed without authority, provided the borrowing is repaid within 20 years under a repayment plan and shown in the accounts.
Moving restricted money into general funds simply because the trustees would prefer to spend it elsewhere is not a legitimate transfer, because restricted money must be used for the purpose on which it was given.
What if a restricted fund goes into deficit?
A restricted fund should not normally show a negative balance, because it means the charity has spent more on the purpose than it received. Regulation 40 of the Charities (Accounts and Reports) Regulations 2008 requires the annual report to give particulars of the steps taken to eliminate a fund deficit. Commission guidance on the trustees’ annual report asks for an explanation of how the deficit occurred and the steps taken to remove it.
How do funds relate to reserves?
CC19 defines reserves as the part of unrestricted funds that is freely available to spend on any of the charity’s purposes. Restricted funds are outside the definition. From unrestricted funds, the guidance excludes fixed assets used in the charity’s work, social investments, designated funds set aside for essential future spending, and commitments not provided for as liabilities. Under SORP 2026 the trustees’ report must reconcile the reserves figure to the accounts, so the fund analysis needs to support that reconciliation.
How does this work in practice?
Illustration only. A community charity starts the year with £80,000 of unrestricted funds and receives:
| Item | Unrestricted | Restricted | Endowment |
|---|---|---|---|
| General donations | £60,000 | ||
| Grant for a youth project | £30,000 | ||
| Gift to be invested, income only to be spent | £100,000 | ||
| Spending | (£55,000) | (£34,000) | |
| Transfer to cover project overspend | (£4,000) | £4,000 | |
| Closing funds | £81,000 | £0 | £100,000 |
The youth project overspent by £4,000 and the trustees chose to meet it from general funds, so a transfer brings the restricted fund back to nil. The £100,000 endowment is excluded from gross income for threshold purposes. If the trustees also designate £20,000 of unrestricted funds for a new minibus, the £81,000 is split between £20,000 designated and £61,000 general, and the reserves calculation starts from the general figure.
What mistakes come up most often?
- Recording restricted grants in unrestricted funds because the money arrived in the general bank account.
- Treating designated funds as restricted, or describing them as restricted in the trustees’ report.
- Charging all central costs to unrestricted funds, when a fair share of support costs may be chargeable to restricted projects if the funding terms allow.
- Releasing surplus appeal money without checking the appeal wording or obtaining the authority needed.
- Leaving a restricted fund in deficit without any explanation in the annual report.
- Counting endowment receipts in gross income when testing accounting and audit thresholds.
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Related Accountapedia entries
- Transfers between charity funds
- Designated funds vs restricted funds
- Can a restricted fund be in deficit
- Writing a charity reserves policy
- The statement of financial activities (SoFA)
Sources
- GOV.UK: Charities and reserves
- GOV.UK: Charity fundraising appeals using donations when youve raised more tha
- GOV.UK: Permanent endowment rules for charities
- Financial Reporting Council: Frs 102
- GOV.UK: Accruals accounts cc17 sorp frs 102 charity accounting template
- ICAEW: Summary of changes
- GOV.UK: Charity accounts rules for charitable incorporated organisations cios
- legislation.gov.uk: SI 2008/629, regulation 40
- GOV.UK: Prepare a charity trustees annual report
- ICAEW: Charities and llp sorps announced whats changed
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.