From 6th April 2026, charities and Community Amateur Sports Clubs (CASCs) have been operating under a significantly strengthened charity tax regime. The Finance Act 2026 introduces reforms aimed at closing perceived loopholes in the treatment of approved charitable investments.
While the government has stressed that the changes are intended to target a small number of abusive arrangements, the legislation widens HMRC’s powers and raises the level of compliance for all charities. If you are a trustee or work in a charity’s finance team, you should be reviewing your governance and investment processes now.
A uniform anti‑avoidance test
HMRC recognises 11 categories of “approved charitable investments” which can be held by charities without being treated as non‑charitable expenditure for tax purposes. These are listed in the Corporation Tax Act 2010 and the Income Tax Act 2007, as follows:
Type 1
An investment to which section 512 of the Corporation Tax Act 2010 (or Section 559 of the Income Tax Act 2007) applies.
Type 2
An investment in a common investment fund established under section 22 of the Charities Act 1960, section 24 of the Charities Act 1993 (although this is now repealed), section 96 of the Charities Act 2011 or section 25 of the Charities Act (Northern Ireland) 1964.
Type 3
An investment in a common deposit fund established under section 22A of the Charities Act 1960 (now repealed), section 25 of the Charities Act 1993 (now repealed) or section 100 of the Charities Act 2011.
Type 4
An investment in a fund which is similar to a fund mentioned in relation to Type 2 or 3, and is established for the exclusive benefit of charities by – or under a provision relating to – any particular charities or class of charities contained in an Act (including an Act of the Scottish Parliament).
Type 5
An interest in land, other than an interest held as security for a debt.
Type 6
Any of the following issued by the Government in the United Kingdom:
- Bills
- Certificates of Tax Deposit
- Savings Certificates
- Tax Reserve Certificates
Type 7
Northern Ireland Treasury Bills.
Type 8
Units in a unit trust scheme or in a recognised scheme.
Type 9
A deposit with a bank in respect of which interest is payable at a commercial rate, and which is not made as part of an arrangement under which a loan is made by the bank to some other person.
Type 10
A deposit with the National Savings Bank, a building society or a credit institution which operates on mutual principles and which is authorised by an appropriate governmental body in the territory in which the deposit is taken.
Type 11
Certificates of deposit.
Approved charitable investments acquired on or after 6th April 2026
From 6th April 2026, in order to be approved, a charitable investment must not only fall within types 1 to 11 (above) but must also be made for an allowable purpose.
If an investment does not fall within types 1 to 11, it may still be an approved investment if it is made for an allowable purpose.
What is an “allowable purpose”?
The statutory definition is set out in the Finance Act 2026, which amended section 558 Income Tax Act 2007 and section 511 Corporation Tax Act 2010.
An investment is made for an allowable purpose if, looking at all the circumstances, it is reasonable to conclude that the investment is made:
- Solely to benefit the charity, or 2-
- To benefit the charity together with one or more ancillary or incidental purposes, and
- It is not made for the avoidance of tax (by the charity or by any other person).
All three elements must be satisfied.
What does “benefit the charity” mean?
The test is centred on substance rather than form. The benefit must be real, demonstrable and linked to the charity’s purposes, not just a side‑effect of a tax‑efficient arrangement.
‘Benefit’ can include:
- Generating income or capital growth to fund charitable activities
- Supporting the charity’s mission through programme‑related or social investments
- Protecting or prudently growing charitable assets in line with trustees’ duties
This will ensure tax law is more closely aligned with the Charity Commission’s purpose‑based approach to investment (e.g. CC14 guidance).
Ancillary or incidental purposes
An investment can still qualify even if someone else benefits, as long as:
- The charity’s benefit is the main purpose, and
- Any other benefit is secondary, incidental or necessary to achieving that charitable benefit
Examples might be:
- A social investment that supports a beneficiary group while also giving modest commercial returns
- An investment fund structure where intermediaries earn fees, but the dominant purpose is charitable impact
Absolute exclusion: tax avoidance
An investment will not be for an allowable purpose if it is made for tax avoidance, even if it technically benefits the charity.
This includes arrangements where:
- The structure is designed primarily to obtain tax relief
- A donor or connected person gains a tax‑driven financial advantage
- The charitable benefit is subordinate to the tax outcome
From April 2026, all categories of approved charitable investments are subject to this anti‑avoidance condition (it previously applied to only one category).
What this change means in practice
To sum up, before 6th April 2026:
- The rules relied on a rigid list of permitted investment types
- Charities often struggled to fit modern or impact investments into the framework
However, from 6th April 2026:
- The law adopts a purpose‑based test
- Trustees must be able to evidence why the investment benefits the charity
- HMRC has power to approve non‑listed investments if the allowable purpose test is met
What must charities do now?
Charities must now be able to demonstrate, across their entire investment portfolio, that decisions are driven by legitimate charitable and financial objectives rather than tax outcomes. Even long‑standing or conventional investments could be subject to challenge if they indirectly facilitate tax advantages for connected persons or counterparties.
The government has been clear that most charities already operate within the spirit of the rules. However, the expansion of anti‑avoidance tests – particularly across all approved investment types – means charities must now take a considerably more rigorous approach in documenting and evidencing their decision‑making processes.
Importantly, these reforms sit alongside HMRC’s wider focus on stronger sanctions for non‑compliance, including the potential withdrawal of tax reliefs where charities repeatedly fail to meet their tax obligations. It can be seen, therefore, that failure to comply with legal and regulatory requirements can have very serious consequences for charities.
Action Points for Charities
The changes now have taken place, so charities should consider taking the following steps as soon as possible:
1- Review investment portfolios
Assess all existing investments against the new “benefit of the charity and not tax avoidance” test and document the commercial and charitable rationale.
2- Strengthen investment governance
Ensure investment policies explicitly reference the new anti‑avoidance requirements and are approved at trustee level.
3- Improve record‑keeping and audit trails
It is likely that HMRC scrutiny will increase; clear documentation will be essential in demonstrating compliance.
4- Seek professional advice where appropriate
Particularly for larger or more complex charities – but smaller charities may well need guidance too – specialist tax advice may help mitigate risk.
And on the subject of professional advice…
