Can a charity borrow money, and what do the trustees have to do first?

England and Wales: This page sets out the position in full. Scotland: a genuinely different regime, not a variant of the England and Wales one — there is no consent gate at all, and borrowing rests instead on a default trustee power the governing document can exclude — see below. Northern Ireland: a different regime again — trustees can apply to the Department for Communities for power to mortgage charity land, and there is no advice-based route of the England and Wales kind — see below.

Does the charity have the power to borrow?

Charity borrowing starts with the governing document, not the loan terms. Borrowing without the power to do so is a breach of trust (for a company or CIO, a breach of the trustees’ duties), however good the deal. That check comes first for trustees in England and Wales, Scotland and Northern Ireland alike.

Land is different. Offering it as security can need a Charity Commission order in England and Wales, or a power from the Department for Communities in Northern Ireland. In Scotland, OSCR has no consent role.

“Can a charity borrow money” is two questions, and the second one gets asked long before the first. A charity weighing a loan tends to go straight to the rate, the term and the repayments. Those are the terms a lender offers.

Whether the trustees may agree to any of it is another question. The charity’s own governing document answers it, not the loan market. A good rate and a sound business case are no defence if the trustees had no power to act.

For a charitable company or a CIO, the constitution usually gives a fairly wide power to borrow. But “usually” is not “always”. An older or narrowly drawn governing document can still restrict it.

An unincorporated charity, such as a trust or association, has no separate legal personality and no general company-law capacity behind it. What it can do rests more directly on what the trust deed or constitution says.

Either way, the check is the same. Read the governing document itself: map your governing document. Do not assume the power exists because borrowing seems normal for a charity.

What should the borrowing minute record?

The minute should record the affordability analysis, not just the decision to borrow. Once the power is confirmed, the trustees’ duty to manage the charity’s resources responsibly is the reason to record more than a decision. That is one of the 6 duties CC3 sets out generally, not a separate task bolted on beside it. CC3 tells trustees in England and Wales to “take special care when investing or borrowing” and not to “over-commit” the charity. A recorded analysis of whether the charity can afford the loan is how a board shows it did that.

Test the repayment schedule against the cashflow forecast, not against the annual budget. The test is whether the forecast shows the charity can cover the months when repayments fall due. Whether the year as a whole works out is not the test.

A repayment schedule the forecast cannot support is more than an affordability problem. It is the kind of fact a going concern assessment needs to weigh (see assess going concern). An analysis that looks doubtful should feed into that assessment. It should not be minuted and set aside.

The minute should record what was weighed, not just the resolution to borrow itself:

• the power relied on
• the repayment schedule, as tested against the forecast
• any security offered
• any covenants accepted
• any advice taken before the decision was made

A minute that records only the decision gives a later reader nothing to show the trustees met their duty. A minute that records the analysis does.

Can lease accounting breach an existing loan covenant?

It can. A charity that already has a loan, and is now thinking about a further one, has a mistake to check for. It has nothing to do with the new borrowing.

Under the current SORP’s leases module, leases that used to sit off the balance sheet now come onto it. In the old accounting terms, those are most operating leases.

A charity may have treated a lease for premises, vehicles or equipment as a simple running cost. That lease can now become a recognised asset and a matching liability. If a borrowing covenant is written against a balance-sheet ratio, that ratio can move enough to breach the covenant. Nothing about the charity’s real finances will have changed at all.

Check this expressly, because it is so easy to miss. People think of the new lease rules as an accounting change, not a financing event. So nobody thinks to reread the loan agreement when it happens.

Which leases come onto the balance sheet is set out in build your lease register. That includes the low-value exemption, which has no money threshold, and the photocopier grey area. Carry any judgement call recorded there into the covenant check; do not guess at a settled answer.

Borrowing on the security of land: three separate regimes

If you offer charity land as security for a loan, each of the three jurisdictions has its own set of statutory rules. The sections on power, the minute and leases hold wherever the charity is registered. But they are no longer the whole answer once land comes into the picture.

The three regimes are not variations on a theme. Each asks for its own things, from its own starting point.

Getting this wrong does not just risk the trustees personally. It can mean the security itself was never validly created. That is a problem for the charity’s negotiating position with the lender as well as for the trustees.

England and Wales: an order, or proper written advice first

No mortgage of land held by or in trust for a charity may be granted without an order of the court or the Charity Commission. That is the starting ban.

But it has a built-in way out. The ban does not apply if, before executing the mortgage, the trustees have got and considered proper advice. That advice must be given to them in writing on the relevant matters (s.124(2)–(3)). For a loan they are: whether the loan is necessary for what the trustees want to do, whether its terms are reasonable for a charity, and whether the charity can repay on those terms.

Getting that advice in writing first lets the deal go ahead without going to the court or the Commission at all. The mortgage document itself must also carry the statements s.125 requires, including that there is power to grant it and that the advice requirement has been met.

That advice does not have to come from an outside professional. Since 14 June 2023, the adviser can be a charity trustee, or an officer or employee of the charity. They must still meet both of the underlying tests:

• the trustees must reasonably believe the adviser is qualified by ability and practical experience in the relevant financial matters
• the adviser must have no financial interest in the transaction the advice concerns

The second test is likely to rule out, for example, a trustee who would also be personally guaranteeing the loan. Whether a particular adviser meets both tests is a question for a solicitor.

Where the loan is drawn down in stages rather than all at once, fresh written advice is needed before each further advance (s.124(7)), and the trustees must certify that they obtained it (s.125(6)). Advice before the first is not enough.

A few charities sit outside this framework entirely. An exempt charity (see excepted and exempt charities) needs no advice and no order. But the mortgage document must still say whether the charity is an exempt charity.

Do not extend that to an excepted charity. That is another category and is not carved out at all. The full advice-or-order requirement applies to an excepted charity exactly as it does to any other.

Scotland: no consent gate, but a power the governing document can exclude

A Scottish charity needs no consent from OSCR to borrow or to grant security. Scotland’s answer starts from the other end. Section 16 of the 2005 Act sets out a closed list of actions that need OSCR’s prior consent:

• amending the charity’s constitutional purposes
• amalgamating
• winding up
• applying to the court about any of those three

Borrowing money or granting security over land or any other asset does not appear in it. That is not a gap in guidance. It is the statute’s own list, read directly. It does not stretch by implication to cover borrowing.

For a charitable trust, what governs borrowing instead is a default power in trust law. Under the Trusts (Scotland) Act 1921 s.4(1)(d), trustees may “borrow money on the security of the trust estate or any part thereof, heritable as well as moveable”. That holds “where such acts are not at variance with the terms or purposes of the trust”. It is there unless the trust’s own terms take it away, and it needs no one’s consent.

Scotland’s investment power is covered separately in Do we need an investment policy, and what should it cover?. Borrowing, unlike that power, carries no statutory advice duty of its own. The advice-and-suitability duty added by the 2005 Act applies only to the investment power, not the borrowing one.

A charitable company’s capacity to borrow comes instead from ordinary company law. A SCIO’s comes from its own general capacity clause. Both are subject to what their own constitutions say.

A later Act, already passed, would in time replace this default power with a broader general power for trustees. But it is confirmed not yet in force, so it changes nothing about the position today.

We found no dedicated OSCR guidance on borrowing or land security when researching this page. That is a real gap in what the regulator has published, not a sign that no rule exists. Creating a formal security over Scottish land is its own area of conveyancing work, outside what this page covers. This page points to it but does not describe it.

Northern Ireland: a Department power, and no advice route

Northern Ireland has no self-certifying route of the kind England and Wales offers. The Charities Act (Northern Ireland) 2008 provisions that would have set up a mortgage regime like England and Wales’s (ss.60 to 62) have never been brought into force.

What operates instead is section 18 of the Charities Act (Northern Ireland) 1964. Trustees can apply to the Department for Communities for power to mortgage charity land. If the Department is satisfied the mortgage would benefit the charity, it may give that power. It may set conditions. The section applies even where some other Act made the land inalienable.

Getting proper written advice is not a substitute for that power in Northern Ireland: the 1964 Act has no advice-based alternative. Whether a particular charity needs the Department’s power, given what its governing document already allows, was not established for this page. That is a question for a solicitor or the Department before any mortgage is signed.

For a charitable company, the Charity Commission for Northern Ireland also has its own guidance on consents. We could not confirm how that process fits with the Department’s own consent route for a mortgage. It is flagged here rather than guessed at.

With the borrowing position minuted, the year-end work begins. A cash-basis charity goes next to prepare receipts and payments accounts. Others convert your records to the accruals basis.

Common mistake: not checking whether new lease liabilities breach an existing borrowing covenant

Putting leases on the balance sheet under the current SORP is seen as an accounting change, not a financing event. Nobody thinks to reread the loan agreement when it happens.

The accounting change alone can breach a covenant written against a balance-sheet ratio. Nothing about the charity’s real financial position has to move. Check the loan agreement expressly when leases come onto the balance sheet.

Worked example

Saltmarsh Trust, a charitable company, is considering a loan to fund a building project. Its constitution’s borrowing power is confirmed first, before any talks with a lender go further. The board’s minute records:

• that power
• the proposed repayment schedule, tested month by month against the cashflow forecast
• the security the lender is asking for
• the covenants the loan agreement would impose
• the advice taken before the decision

It records all of these, not just the resolution to borrow.

The lender is asking for a charge over the building itself. So the trustees treat that as a separate question from the borrowing decision. They take advice on it before going further, rather than assuming the same due diligence covers both.