https://www.smartbusinessrecovery.co.uk/contact-us As an insolvency practitioner, our duty is to look at all options when a charity is struggling financially. Sometimes people assume our only role is to close the charity, but in fact, we look at all options to see if there is a way for the organisation to survive. Sometimes that is possible, and sometimes we need to face the unfortunate truth that the charity is not financially viable and needs to go the insolvency route. When that happens, it’s vital that we look at several key issues as soon as possible so that everything is legal and follows the correct process. One of the most complex of these is restricted funds. We are happy to advise on other areas but for now let’s look at how restricted funds can and can’t be used.
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Restricted Funds, Insolvency and Charities – Understanding the FactsPosted: May 5, 2025

Over the years, we have dealt with many charities with financial issues, and one of the least understood areas is the circumstances surrounding what are known as Restricted Funds.

 

As an insolvency practitioner, our duty is to look at all options when a charity is struggling financially. Sometimes people assume our only role is to close the charity, but in fact, we look at all options to see if there is a way for the organisation to survive. Sometimes that is possible, and sometimes we need to face the unfortunate truth that the charity is not financially viable and needs to go the insolvency route. When that happens, it’s vital that we look at several key issues as soon as possible so that everything is legal and follows the correct process.

One of the most complex of these is restricted funds. We are happy to advise on other areas, but for no,w let’s look at how restricted funds can and can’t be used.

 

What are restricted funds?

The first thing to look at is what are, and are not, restricted funds. For convenience, let’s just focus on what restricted funds are firs,t and then we can go on to look at what you can and can’t do with them.

Restricted funds are donations or grants given to a charity with specific conditions attached. These restrictions mean the funds can only be used for a particular purpose or project, as outlined by the donor or funding body.

So, what that means in plain English is that these particular funds are ringfenced and can only be used for the purpose they were meant for.

Some common examples of the kind of donations that create restricted funds could include:

These are just a few examples, but they give a good idea of the kind of charitable aims surrounding restricted funds.

Once they are designated as being for a purpose, restricted funds cannot be used for any other purpose. That means they must:

The charity doesn’t usually need to go such lengths as keeping separate bank accounts or similar, but they must be able to account for the funds. So, records must be totally transparent about how they are used, where they are held, and they must also be clearly and accurately identified in the charity’s accounts.

 

Can restricted funds be unlocked for general charity purposes?

The temptation here is to give an emphatic ‘no’ to using restricted funds for any general purposes. In the letter of the law, this is absolutely the case. Restricted funds are ringfenced for a specific use. However, as always, things are not quite as clear-cut as we would all like.

The first thing to say is that anyone involved with a charity that is using restricted funds for any purpose that raises a question about ‘legitimate use’ needs to be very careful before they proceed. Check fully and take expert advice about whether the use you intend to put them to will be allowable. If you don’t confirm, and it turns out later that you misused restricted funds, you could find yourself in some very hot water.

That said, (and after repeating our usual guidance that every situation is different and you should always seek professional advice when you need it), here are a few thoughts that may help.

  1. The first thing to do is check that the funds are fully restricted. For example, if you have been left a legacy in a will and the donor expresses a general ‘wish’ for their use, rather than a very specific one, the interpretation of how these are restricted funds may allow their use.
  2. Older legacy donations may no longer be relevant to the charity or reflect changes in the modern world. A legacy donation for outdated equipment is an obvious example.
  3. Check what powers you may have to change the purpose of the funds in the governing documents. For charities holding smaller value restricted funds (below £10,000), and if certain conditions are met, the trustees can potentially resolve to change the purpose of the funds. This will be subject to the charity commission consent.
  4. Is there the option to contact the donors and simply ask them to consent to a change of purpose for the restricted funds?

Restricted funds will generally fall into two broad categories.

There is sometimes a slightly grey area around what is covered by the restriction on the use of the funds, though. Unclear or non-specific descriptions can be difficult to deal with and may allow for wider use. Again, it is vital to check how you are interpreting the donor's wishes.

 

Can restricted funds be redirected to pay a charity’s debts if it is insolvent?

The short answer is, technically, no!

Restricted funds are, by their very nature, restricted to the purpose for which they were donated. Therefore, in practice, they are often not available to help pay general debts, no matter what the circumstances.

What that means in practical terms is that if a UK charity becomes insolvent (unable to pay its general debts), the trustees cannot automatically use restricted funds to cover the charity’s liabilities. Restricted funds remain protected and ring-fenced, and using them improperly could constitute a breach of trust and charity law.

However, in some circumstances, as we mentioned earlier, it could be possible to change their use. You could, for example, ask the original donors to allow redirection of the funds, or it may be that the description of how they are to be used has some leeway in it.

Alternatively, legal permission could, in theory at least, be sought to lift or alter the restrictions due to exceptional circumstances. However, typically this will only be granted if the original charitable purpose is no longer possible or practicable and no other options are available that meet the wishes of the donor. A good example of when this is more likely to be acceptable legally is if the funds were intended for something that is difficult to define or no longer exists in the same form. Times change, and the use of the funds may well need to change with them. If that can be proven, then the charity could look to a change of purpose. However, it will need to be a solid, legitimate reason.

 

Restricted funds in UK charities are protected and not freely accessible for any other purpose, and that could include paying debts during insolvency. Trustees must respect the original purpose and seek appropriate approval before attempting to redirect restricted funds for insolvency purposes.

Misusing restricted funds in a charity during insolvency, or for any other reason, is considered a serious breach of trust and charity law. It can result in significant consequences for the trustees or the charity officers involved, including legal action against them, resulting in criminal charges or becoming personally liable to repay the funds.

 

At Smart Business Recovery, we specialise in third sector insolvency and guidance, so if you think you are facing financial issues and this article has made you think you need advice, get in touch and let’s see where you stand.

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https://www.smartbusinessrecovery.co.uk/contact-us As an insolvency practitioner, our duty is to look at all options when a charity is struggling financially. Sometimes people assume our only role is to close the charity, but in fact, we look at all options to see if there is a way for the organisation to survive. Sometimes that is possible, and sometimes we need to face the unfortunate truth that the charity is not financially viable and needs to go the insolvency route. When that happens, it’s vital that we look at several key issues as soon as possible so that everything is legal and follows the correct process. One of the most complex of these is restricted funds. We are happy to advise on other areas but for now let’s look at how restricted funds can and can’t be used.

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The Government has announced a new scheme to help individuals with debt problems. The scheme is described as ‘Breathing Space’ and comes into effect on 4 May 2021.

New Scheme Announced for Individuals with Debt Problems.

The Government has announced a new scheme to help individuals with debt problems. The scheme is described as ... more

I also think it is fair to say that Pre-Pack sales by an Administrator have had a high level of press coverage. All the evidence suggests that a Pre-Pack sale commonly leads to a better return to creditors than a forced sale shut down. But equally, creditors are understandably concerned because the sale is conducted very quickly following the appointment of the Administrator and often, they are the last people to hear about it. This concern is always worse when the sale is to a connected party.

Pre-Pack Sales to Connected Parties – The New Evaluator Process

First of all, it is fair to say this blog is very technical and probably more for our professional contacts, so if ... more

The Insolvency Service produces monthly figures for both corporate and personal insolvencies and as mentioned previously, I rarely comment on them. Partly because insolvencies are seasonal, so generally increase in the first and third quarter of the year and decrease in the second and fourth quarter and partly because there is not much to talk about.

Latest Insolvency numbers are released for March 2021.

The Insolvency Service produces monthly figures for both corporate and personal insolvencies and as mentioned ... more

The answer to the question ‘when is a good time to close your solvent business’ is never an easy one. However, with capital gains tax and asset disposal relief both still working in your favour, if you are looking to close your solvent business then 2021 or early 2022, may well be the time to make the move. If not, you could see a much less favourable tax landscape in the future.

Good news for those planning a Members’ Voluntary Liquidation (MVL)

The answer to the question ‘when is a good time to close your solvent business’ is never an easy one. ... more

Groundhog Day - Government Extends various measures to assist struggling business

Why Groundhog Day you ask? Over the last 12 months, I have posted about various Governments measures brought in ... more

VAT Deferrals – What can you do now if you still have not got the funds to pay?

Believe it or not, it has been almost 12 months since businesses in the UK were first given an answer to the ... more

I thought I would provide some thoughts on how the change may affect you because, despite the budget not quite producing the fireworks some were predicting, it did have a lot worth discussing in there.

Budget 2021 – Thoughts from an Insolvency Practitioner

Like most people, I get several excellent emails and budget summaries every year and I would guess you do too. ... more

The Insolvency Service produce monthly figures for both corporate and personal insolvencies and to be honest I rarely comment on them. Partly because insolvencies are seasonal so increase in the first and third quarter of the year and decrease in the second and fourth quarter and partly because there is not much too talk about.   However, I feel that there is a clear trend and whilst on paper the trend appears to be good news it hides several issues which will hit the economy later in the year.

Company Insolvencies in January 2021 50% lower than January 2020, but is this good news?

The Insolvency Service produce monthly figures for both corporate and personal insolvencies and to be honest I ... more

Smart Business Recovery is pleased to welcome a new member of the team

Meet Sharon – an old and new colleague.

If you have been reading our blogs or social media recently you will probably have noticed that we are very busy at ... more

Looking ahead isn't always easy but despite 2020 begin one of the most unusual years ever for many of us, there are some signs of stability ahead.

Some optimism, some hope and a big dollop of realism – Insolvency and business in 2021

I am already on the third draft of this blog. Every time I managed to get pen to paper the Covid situation or ... more

Over the last few days, a number of extensions have been announced which it is hoped to assist business affected by COVID 19. These are as follows;

Government Extends various measures to assist struggling business

Over the last few days, a number of extensions have been announced which it is hoped to assist business affected by ... more

Will I get my money? The order of payment for creditors.

There is no such thing as a simple way to close a business. Whether it is an administration or a liquidation, the ... more

What’s left for you? What will the change to HMRC preferential creditor status really mean to SMEs?

Up until the early 2000s HMRC were a preferential creditor in cases of insolvency. When this changed in 2003 it was ... more

The Government Announces new rules regarding Pre-pack sales to be implemented.

The Government Announces new rules regarding Pre-pack sales to be implemented.

The Government has announced that new rules will be brought into legislation as soon as possible. The following was ... more

Measures put in place to protect businesses from insolvency will be extended to continue giving them much-needed breathing space during the coronavirus (COVID-19) pandemic, the government announced today (24 September). UPDATED 27 November 2020

Government gives businesses much-needed breathing space with extension of insolvency measures

UPDATED 26 NOVEMBER 2020 The Government has announced extensions to previous temporary measures relating to ... more

Taking stock – Are your customers stock levels a threat to your cashflow?

There is a potential situation arising that could soon be causing some insolvency related issues, cashflow problems ... more

Changes to the regulations surrounding insolvency could spell trouble for SMEs. This article takes a look at what some of these changes are and the impact they could have on cashflow.

Supplier beware – Credit control and the Corporate Insolvency and Governance Bill 2020

Insolvency legislation rarely makes the news which is probably why one of the biggest changes to the way it works ... more

Dividends, Overdrawn Loan Accounts and Insolvency - Updated

This is a very common problem in insolvency and here is the reason why!! At some stage, a director of a new ... more

Keep your cashflow forecast up to date – 5 tips and 1 warning

Why then are we bothering to dedicate a full article and video to cashflow forecasts if they are so common? Well, ... more

Since the Covid-19 pandemic insolvency has been on the minds of many business owners. Pressing the panic button is unlikely to be the right response though.

Am I insolvent? – Why pressing the panic button may not be the best idea.

The initial shock of the lockdown. When the government announced the Coronavirus lockdown our telephone began to ... more

Bankrupt, Insolvent or in need of rescue?

  What happens when you reach out to an Insolvency Practitioner?   I doubt any business owner ... more

Employee rights is an insolvency

What are employees entitled to in an insolvency process?

One of the major aspects of any insolvency is what will happen to the employees. Any news story in relation to an ... more

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