Total return approach for permanent endowment

A charity in England and Wales with permanent endowment held for investment can resolve, under section 104A of the Charities Act 2011, to invest it on a total return basis, so that capital gains as well as dividends and interest can be spent as income. The trustees must split the fund into the value of the original endowment and the unapplied total return, take proper advice, and then allocate the return under the Charity Commission’s Total Return Regulations. In the accounts the unapplied total return stays in the endowment fund until the trustees allocate it to income, and the annual report must explain how the allocations were decided.

What is the total return approach?

Under the standard rules, a charity holding permanent endowment for investment can spend only the investment income, such as dividends, interest and rent. Capital gains must be kept as part of the endowment. The Commission’s guidance Total return investment for permanently endowed charities explains that this can cause difficulty when income yields are low and gains are high: current beneficiaries receive less while future needs may be over provided for.

A total return approach treats all the return, income and gains together, as one pot called the unapplied total return. The trustees then decide how much of it to spend, how much to add back to the endowment, and how much to carry forward. The power was added to the Charities Act 2011 as sections 104A and 104B by section 4 of the Trusts (Capital and Income) Act 2013. The detailed framework is in the Charities (Total Return) Regulations 2013, made by the Commission and amended in 2018 and 2023.

Which charities can use it?

Section 104A applies to an available endowment fund: the whole of a charity’s permanent endowment if it is all held on the same trusts, or any part held on different trusts. The fund must be held for investment. The Commission’s example is a village charity with a hall given for use by local people and a £5,000 gift to be invested with only the income spent; only the £5,000 can sensibly go into total return. A charity with several endowments can choose which to include, called the relevant fund.

The power is for permanent endowment. Expendable endowment can already be spent if the trustees decide, so it does not need the regime. Our guide to restricted, unrestricted and endowment funds explains the difference.

How do trustees adopt it?

1. Decide it is in the charity’s interests. Section 104A(3) requires the trustees to be satisfied of this.
2. Take proper advice. The Regulations require trustees to obtain and consider proper advice unless they reasonably conclude it is unnecessary or inappropriate, for example where the cost would be disproportionate.
3. Split the fund. Before passing the resolution the trustees must identify the assets representing the value of the original endowment, including later gifts added to it, and those representing unapplied investment return: income not yet applied plus capital gains, less capital losses. A reasonable estimate is acceptable where full tracing is impractical, but once made the split cannot be revisited.
4. Pass the resolution in line with the governing document. The Commission does not need to be notified, but recommends recording the relevant fund, the valuation date and whether any earlier Commission order is being discharged.

How is the unapplied total return used?

Once the approach is in place, the Regulations allow three movements:

• To the income fund. The trustees may allocate unapplied total return to be spent at any time, provided the unapplied total return is positive overall. A negative return in one year does not stop an allocation if the accumulated balance is still positive. Once allocated, it must be spent within a reasonable period, like any income.
• To the investment fund. Regulation 5 lets trustees add part of the return to the investment fund, capped by the rise in a chosen prices index since the last such allocation or since adoption.
• From the investment fund. Regulation 4 lets trustees release part of the investment fund itself to the income fund, but total releases not yet repaid cannot exceed 10% of the investment fund’s value, and the amount must be recouped over a period and at a rate the trustees decide.

Unallocated return should be invested in the same way as the endowment, because it is not yet free to spend. The Commission warns that trustees with no policy for the unapplied total return risk the same criticism as charities holding excessive reserves.

Following the Charities Act 2022 and amending regulations made in 2023, a charity using total return can also pass a further resolution under section 104AA to use the fund for social investments expected to make a negative or uncertain financial return, provided losses are offset by gains elsewhere in the relevant fund.

How is total return accounted for?

The Commission’s guidance directs charities preparing accruals accounts to the total return module of the Charities SORP. ICAEW’s summary of SORP 2026 confirms that module 20 applies in full to all tiers for charities in England and Wales that adopt total return, and adds disclosures where funds are used for social investments with a negative or uncertain return.

In the fund accounts:

• the investment fund and the unapplied total return both sit within the endowment column;
• investment income and gains and losses on the relevant fund are credited to the endowment fund as part of the unapplied total return;
• an allocation to the income fund is a transfer from endowment to unrestricted or restricted income funds, depending on the endowment’s terms, and is explained in the funds note, as covered in transfers between charity funds.

Regulation 6(4) requires the trustees’ annual report to explain how the value of the investment fund was established, the date from which income and gains have been allocated to the unapplied total return, and the considerations and policies behind each year’s allocations. Anyone who advised on the allocations must be named. If the charity does not have to prepare an annual report, the information goes in a note to the accounts.

How does this work in practice?

Illustration only. A charity adopts total return on an endowment worth £500,000, all identified as original endowment. In the first year it receives £10,000 of dividends and the portfolio rises by £30,000.

Endowment fund	Investment fund	Unapplied total return
Opening	£500,000	£0
Dividends and gains		£40,000
Transfer to income fund		(£20,000)
Closing	£500,000	£20,000

Under the standard rules only the £10,000 of dividends could have been spent. Here the trustees spend £20,000 and keep £20,000 as a buffer against future falls. The report explains the spending policy and names the investment adviser.

Can a charity stop using total return?

Yes, but the Commission says it should not be done lightly. If the unapplied total return is negative at that point, Regulation 8 requires the trustees to restore it, and they may add an inflation adjustment, over a period of no more than 10 years. If it is positive, part can be added to the investment fund, capped by the index rise, and any remainder becomes expendable endowment.

How does total return affect reserves?

The Commission’s reserves guidance (CC19) recognises that the flexibility of total return can allow charities with significant permanent endowment to hold lower reserves, because the trustees can draw on the unapplied total return when needed. Amounts already allocated to the income fund and not yet spent should be treated as reserves. See writing a charity reserves policy.

What mistakes come up most often?

• Including property held for use, such as a hall, in the relevant fund.
• Passing the resolution before recording the split between original endowment and unapplied return.
• Adding return to the investment fund above the index cap.
• Releasing more than 10% of the investment fund, or with no recoupment plan.
• Showing allocations as income rather than as a transfer from endowment.
• Leaving the required explanations, and the adviser’s name, out of the annual report.

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Related Accountapedia entries

• The statement of financial activities (SoFA)
• The Charities SORP explained
• Designated funds vs restricted funds
• Can a restricted fund be in deficit
• Accounts for charitable incorporated organisations

Sources

• GOV.UK: Total return investment for permanently endowed charities
• legislation.gov.uk: Act 2011 c. 25, section 104A
• legislation.gov.uk: Act 2011 c. 25, section 104AA
• ICAEW: Summary of changes
• ICAEW: Fund accounting pitfalls and new opportunities
• GOV.UK: Charities and reserves

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.