Updates to HM Revenue & Customs’ detailed guidance notes for charities

HM Revenue & Customs (‘HMRC’) has updated its detailed guidance notes for charities to reflect changes in legislation effective from April 2026. But perhaps the most significant change is yet to come.

Finance Act 2026 made three changes to the tax rules applicable to charities with effect from April 2026. Those changes relate to:

• the tax treatment of legacies;
• approved charitable investments; and
• tainted charity donations.

However, anticipated changes to the rules in relation to Fit and Proper Persons have yet to materialise.

Legacies

Although most income received by charities is technically within the charge to tax, charities are able to claim exemption from tax on their income provided certain conditions are met. One of those conditions is that the income must be applied for charitable purposes only.

Historically, legacies received by a charity have been outside the scope of tax, and so there was no need for a specific exemption from tax for legacies - the legacies would not be taxable regardless of how the legacy was applied. This could result in a loss (to HMRC) of tax if a charity received a legacy and incurred non-charitable expenditure.

To remedy this, Finance Act 2026 has brought legacies within the charge to tax, but has exempted them from tax if they are applied for charitable purposes only. So legacies are in effect now treated the same as most other sources of income received by a charity.

Charites will note that the Charity and Community Amateur Sports Club supplementary pages to their tax returns now contain an additional box, which requires charities to report the amount of their legacy income. They are also required to provide details of each testator.

Approved charitable investments

The tax rules in relation to charitable investments previously allowed a charity to make certain investments that benefited a third party more than it did the charity. For example, if a charity purchased land from an individual, the purchase would have been acceptable from a tax perspective even if the main purpose was to enable the individual to realise the value of the land.

The tax rules in relation charitable investments have therefore been tightened up, and now require that all investments must be made by a charity for an ‘allowable purpose’. That is, it must be reasonable to draw the conclusion, from all the circumstances of the case, that the investment was made for the sole purpose of benefiting the charity and not for the avoidance of tax by any person. When establishing whether an investment is made ‘for the sole purpose’ of benefitting the charity, other ancillary or incidental purposes can be ignored.

According to HMRC’s updated guidance, a charity’s trustees must be able to explain and justify their investment and loan making decisions based on the information available at the time, and demonstrate that the investment or loan was made to benefit the charity and not for the avoidance of tax. HMRC may ask to see evidence of the trustees’ decision-making process and the factors they considered.

Whether any other benefits arising from the investment are ancillary or incidental will be determined by HMRC after full consideration of the circumstances and commercial rationale for the investment, its purposes and the contemporaneous evidence gathered prior to making the investment and supporting why the investment was made.

Where a non-charitable purpose becomes more than ancillary or incidental, the investment will not satisfy the allowable purpose test, and the charity will risk being charged to tax on an equivalent amount of income.

Charities should therefore ensure that there is detailed contemporaneous evidence in support of their decision making and reasoning for investing charitable funds, and why they concluded that the investment was made for an ‘allowable purpose’. It is not possible to seek clearance from HMRC as to whether a proposed loan or investment will be regarded as meeting these requirements.

Tainted charity donations

In broad summary, the tainted charity donations rules prevent a donor from claiming tax relief for donations to a charity where the amount donated to the charity is in effect returned to the donor (whether directly or indirectly) as part of the same ‘arrangement’.

It seems that HMRC has encountered difficulties in applying these rules in practice, and have seen instances where they would expect donations to be caught by these rules, but aren’t. This is because the rules used to require a ‘financial advantage’ to be provided by the charity to the donor. It is arguable that if someone makes a donation to a charity, and the charity then makes a loan to that person on commercial terms, the donor does not benefit from a ‘financial advantage’.

In response to this, the government has sought to widen the scope of the tainted charity donations rules. They have done this in two ways.

Firstly, they have replaced the term ‘financial advantage’ with ‘financial assistance’, which has been specifically defined as including a loan, a guarantee, an indemnity or any other form of investment, whether or not on arm's length terms.

Secondly, the old rules would only apply if “the main purpose, or one of the main purposes” of the arrangements was to obtain a financial advantage directly or indirectly from the charity to which the donation was made. This ‘purpose’ test has been removed, and the new rules will apply if the effect of the arrangements is to provide financial assistance to the donor. The purpose of the arrangements is no longer relevant.

Hopefully, for most charities, this change will be of academic interest, only, as most would not entertain the idea of entering into circular arrangements with their donors.

Fit and Proper Persons

In order to be recognised as a charity for tax purposes, a charity must be managed by ‘fit and proper persons’. HMRC has said that the fit and proper persons test will be amended so that the test will not be met if a charity persistently fails to comply with its tax obligations. Such charities would then lose their charitable status for all tax purposes (and so would no longer, for example, be able to claim Gift Aid, would no longer be exempt from income tax / corporation tax, and would no longer be able to benefit from the VAT reliefs available to charities).

So the potential tax implications of failing to meet a charity’s tax obligations will be severe. This is therefore likely to focus the minds of those responsible for administering a charity’s tax affairs.

HMRC’s guidance in relation to fit and proper persons has yet to be updated, although we understand that it remains very much a live issue. We await developments with interest…

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Andrew Robinson | Partner | Based in Norwich, Norfolk & Ipswich, Suffolk