Non charitable expenditure by charities

A charity keeps its tax exemptions only on income and gains it applies for charitable purposes. Spending that is not charitable, payments overseas without proper checks, and any investment or loan that is not an approved charitable investment or loan all count as non charitable expenditure, and the charity loses exemption on an equal amount of its otherwise exempt income and gains. From 6 April 2026 every investment must also pass an allowable purpose test, and legacy income has joined the income that can be restricted.

Where are the rules and who do they apply to?

The rules apply to every charity claiming UK tax reliefs, but in two parallel codes. Charities taxed as companies are within Part 11 of the Corporation Tax Act 2010 (Charitable companies etc); charitable trusts are within Part 10 of the Income Tax Act 2007. HMRC’s detailed guidance is in Annex ii (non charitable expenditure) and Annex iii (approved charitable investments and loans) of its charities guidance. The key sections are:

Rule	Charitable companies	Charitable trusts
Non charitable expenditure	CTA 2010 s496	ITA 2007 s543
Payments to overseas bodies	CTA 2010 s500	ITA 2007 s547
Approved charitable investments	CTA 2010 s511	ITA 2007 s558
Approved charitable loans	CTA 2010 s514	ITA 2007 s561

The chargeable period is the accounting period for a charity taxed as a company and the tax year to 5 April for a trust. Our page on charitable trusts covers the trust position in the round; this page concentrates on what counts as non charitable expenditure and how to keep investments and loans approved.

What counts as non charitable expenditure?

Section 2 of Annex ii lists:

• expenditure not incurred for charitable purposes only;
• payments to an overseas body where the charity has not taken steps HMRC considers reasonable to make sure the money is applied for charitable purposes;
• any investment or loan that is not an approved charitable investment or loan;
• losses from non primary purpose trading (primary purpose trading losses are charitable expenditure);
• payments the governing document prohibits or restricts (section 7).

Grants, administration, internal systems and fundraising costs are charitable expenditure. Approved investments and loans are neither charitable nor non charitable expenditure, because money invested or lent is not paid away irrevocably (Annex iii, section 10). HMRC also warns in section 8 of Annex ii that it may challenge accumulated income kept uninvested in cash, or invested where the interests of a trustee or funder conflict with the charity’s.

A less obvious source is retail: the costs of selling goods on behalf of other people under the Retail Gift Aid scheme are non charitable expenditure if the charity runs it directly (Chapter 3, paragraph 3.42.25).

Which investments are approved?

Section 511 and section 558 list the qualifying types. Annex iii summarises them as:

• investments in a charity common investment fund, common deposit fund or similar scheme;
• any interest in real property, unless held as security for a debt;
• shares or securities listed on a recognised stock exchange;
• units in a unit trust scheme and shares in an open ended investment company;
• bank deposits, except deposits made as part of an arrangement for the bank to lend to someone else, such as back to back loans;
• certificates of deposit;
• any other loan or investment that qualifies on the benefit test described below.

For investments acquired up to 5 April 2026 the catch all type, known as type 12, covers any loan or other investment made for the benefit of the charity and not for the avoidance of tax. For investments acquired on or after 6 April 2026, section 4 of Annex iii says every investment, including the listed types 1 to 11, must also be made for an allowable purpose. That means it is reasonable to conclude the investment was made for the sole purpose of benefiting the charity, or for that purpose plus ancillary or incidental purposes, and not for the avoidance of tax by anyone.

What does HMRC look for?

For an investment loan, HMRC will normally accept financial benefit where the loan carries a commercial rate of interest that is paid and actively pursued, is adequately secured, and is made under a formal written agreement with reasonable repayment terms, including loans to the charity’s own trading subsidiary (Annex iii, section 3.4). For subsidiaries that cannot give normal security, HMRC may ask for the business plans and cash flow forecasts behind the decision. Ethical and social investments with a lower return can still qualify if trustees can show the overall benefit to the charity. HMRC’s examples of investments that fail the allowable purpose test include a loan to a company run by a trustee, funded by donations from that same company, and a working capital loan to a subsidiary that had donated away all its profits with no commercial explanation.

Which loans are approved?

A loan that is not an investment is approved under section 514 or section 561 if it is (Annex iii, section 6):

• a loan to another charity for charitable purposes only;
• a loan to a beneficiary of the charity made in the course of carrying out its purposes;
• money in a current account at a bank, unless there is an arrangement to use it to fund a loan by the bank to someone else;
• any other loan made for the benefit of the charity and not for the avoidance of tax.

Charitable companies that are close companies should also consider the loans to participators charge in section 455 CTA 2010 on loans to directors, governors or their associates (Annex iii, section 11). Loans to donors or their connected persons can also trigger the tainted charity donations rules.

What evidence is needed for overseas payments?

Section 9 of Annex ii says a payment to any body or person outside the UK is charitable expenditure only if the charity can show HMRC it took reasonable steps to ensure the money is applied for charitable purposes within Chapter 1 of the Charities Act 2011. Being a charity under local law is not enough. HMRC considers the charity’s knowledge of and history with the recipient, the amounts involved and whether the charity followed its own procedures. A small one off gift to a known partner may need only correspondence on headed paper; larger or ongoing funding needs documented research, written agreements, staged payments, monitoring and clawback terms.

How is relief restricted and reported?

Annex ii, section 4, says a charity loses exemption on an amount of its attributable income and gains equal to its non charitable expenditure, and cannot set its charitable spending against that income first. Attributable income includes Gift Aid, payroll giving, rent, interest, primary purpose trading profits, capital gains and, from 6 April 2026, legacy income. The charity can choose which sources bear the restriction by telling HMRC within 30 days of being notified. Where non charitable expenditure exceeds total income and gains, the excess is carried back to earlier periods, but not to a period ending more than 6 years before the end of the period in which it was incurred (section 6).

On the return, a charity whose investments and loans all qualify ticks box E26 of the CT600E or the equivalent question on the SA907 trust pages. Unapproved investments and loans go in box E185 or box 7.38. A charity can make a formal written claim that an investment or loan is approved at any time after it is made, stating the type, amount, period and section relied on; HMRC gives no approval in advance (Annex iii, section 13).

How does the restriction look in practice?

Illustration only. A charitable company has Gift Aid income of £40,000 and interest of £5,000. It spends £30,000 on grants and lends £12,000 unsecured and interest free to a company owned by one of its trustees, with no written terms. The loan is not an approved loan, so it is £12,000 of non charitable expenditure. Exemption is lost on £12,000 of the £45,000 attributable income, even though grants exceed that amount. The charity chooses to allocate the restriction to Gift Aid income, enters the loan in box E185 and pays Corporation Tax on £12,000.

What mistakes come up most often?

• Informal loans to trustees, founders, donors or connected businesses.
• Lending to a trading subsidiary without a written agreement, interest or security.
• Treating investments made after 5 April 2026 as automatically approved because they are a listed type.
• Paying overseas partners without keeping evidence of checks and monitoring.
• Assuming that because grants exceed the problem amount, no tax is due.
• Ticking the approved investments box without a decision trail to support it.

For the trading side, including when losses are charitable, see charity trading and subsidiaries.

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Related Accountapedia entries

• Do charities pay tax on investment income
• Giving assets to charity: CGT and income tax relief
• Community amateur sports clubs: tax reliefs
• SDLT charities relief
• Company donations to charity: getting tax relief

Sources

• legislation.gov.uk: Act 2010 c. 4, section 496
• legislation.gov.uk: Act 2007 c. 3, section 543
• GOV.UK: Annex ii non charitable expenditure
• GOV.UK: Annex iii approved charitable investments and loans
• GOV.UK: Chapter 3 gift aid

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.