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IEIM404725: Charities: Financial Institution: Examples

Example 1

A UK charitable trust is funded by grants from government, charitable foundations and public donations (including legacies). »Ê¹ÚÌåÓýapp charity has a small number of investments but income derived from these amounts to 2% of the charity’s overall income.

»Ê¹ÚÌåÓýapp Charity is not a Financial Institution and has no CRS reporting obligations because less than half of its income is derived from investing in financial assets.

If asked to self-certify their status (e.g. by a bank, funder or the charity’s investment manager) the charity will indicate that it is an Active Non-Financial Entity.

Example 1a

A UK charitable company is funded by a mix of public donations (including legacies) and investing in financial assets, which are managed by a Financial Institution. Income derived from the investments amounts to 25% of the charity’s gross income.

»Ê¹ÚÌåÓýapp Charity is not a Financial Institution and has no CRS reporting obligations because less than half of its income is derived from investing in financial assets even though the assets it holds are managed by a financial institution.

If asked to self-certify their status (e.g. by a bank, funder or the charity’s investment manager) the charity will indicate that it is an Active Non-Financial Entity.

Example 2

A UK charitable company is funded by a mix of public donations (including legacies) and investing in financial assets, which are managed by a Financial Institution. Income derived from the investments amounts to 51% of the charity’s gross income.

If asked to self-certify its CRS status (e.g. by a bank, funder or the charity’s investment manager) the charity will indicate that it is a Financial Institution.

Example 3

A UK charity has more than 50% of its gross income from investing in financial assets, it has given full discretion on the investment strategy for part of the financial assets to a fund manager, which is a Financial Institution. »Ê¹ÚÌåÓýapp investment strategy for the other part of the financial assets is managed by the trustees of the charity.

»Ê¹ÚÌåÓýapp charity will still be a Financial Institution, as more than 50% of its gross income is from investing in financial assets (however managed), and those assets are managed by a Financial Institution, in whole or in part.

Example 4

A UK charitable trust has more than 50% gross income from investing in financial assets, the assets are invested externally by a Financial Institution according to an investment strategy determined by the charitable trust. »Ê¹ÚÌåÓýapp strategy sets the asset allocation, and some further parameters as to the type of investments the fund manager may invest into, for example to restrict to ethical trading options only. »Ê¹ÚÌåÓýapp managers however decide on a day to day basis which particular stocks and industries to invest into.

»Ê¹ÚÌåÓýapp charity is a Financial Institution as its financial assets are managed by a Financial Institution. Despite the parameters on the types of investment the fund manager has the discretion over investment decisions within those parameters.

»Ê¹ÚÌåÓýapp outcome is the same, irrespective of the amount of the assets that the manager has discretion over. By conferring discretion over investment decisions, in respect of any part of the charity’s assets, that part of the condition for being a Financial Institution is met. »Ê¹ÚÌåÓýapp existence of an investment strategy is not determinative in this example, the key is that the manager has discretion within the parameters that it sets.

Example 5

»Ê¹ÚÌåÓýapp trustees of a UK charity with 50% or more of its gross income from investing in financial assets has used the funds to buy shares in unit trusts, the trustees make the decisions on which units to invest into and the strategy for the investments. »Ê¹ÚÌåÓýappy take advice from a financial adviser to help in making decisions, but the decisions remain with the trustees, who retain discretion over the investments.

»Ê¹ÚÌåÓýapp charity is not a Financial Institution. It has not given discretionary management of its financial assets to a Financial Institution.

As the trustees merely seek advice on investment strategy, this alone does not amount to management, where the decision on how to act on the advice remains with the charity. Investing in shares in unit trusts, in which funds are pooled and then further invested, does not amount to management. »Ê¹ÚÌåÓýapp purchase of shares in a unit trust is more akin to buying shares in a company; the charity is not passing management to the administrator of the unit trust, but retains discretion over which units to buy and sell.

Example 6

A charity receives income from a number of sources; 40% from investing in a Common Deposit Fund, 50% from investing in a Common Investment Fund and 10% from other investments managed by an investment manager, which is a financial institution.

»Ê¹ÚÌåÓýapp investments in Common Deposit Funds are akin to cash deposits and the income from these is not from investing in financial assets.

»Ê¹ÚÌåÓýapp investments in Common Investment Funds are similar to shares in a unit trust, investing in a Common Investment Fund is akin to buying shares in a company, it does not lead to passing discretionary management of funds to a manager. So, while the income received will be income from investing in financial assets, such income is not considered to be managed.

However, as part of the charity’s investments are managed by a Financial Institution and more than 50% of its income is from investing in financial assets, the charity does meet the definition of an Investment Entity.