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Why do clubs, societies and charities have problems investing in insurance bonds?

4 min read 31 Mar 23

What difficulties are there for unincorporated associations and charities considering  investing in insurance bonds?

  • Clubs and societies are likely to be unincorporated associations.

  • Unincorporated associations are not legal entities.

  • Charities can be set up as charitable trusts or charitable companies.

  • Tax exemptions available to charities are compromised by a bond investment.

These organisations are almost certainly ‘unincorporated associations’.

What is an unincorporated association?

An unincorporated association is not a legal entity. Instead, it is an organisation set up through an agreement between a group of people who come together for a reason, other than to make a profit (for example, a voluntary group or a sports club). Membership of course will change from time to time. Typically there will be a written constitution setting out the members agreement to co-operate.

What is the difference between an unincorporated association and a limited company?

An unincorporated association has no legal rights and is not separate from its members. In contrast, a company is an incorporated organisation and therefore has a "legal entity" in law. In the case of a bond investment, this legal entity allows a company to be a policyholder (the directors complete the application form on behalf of the company).

Why can an unincorporated association not apply for a bond?

Any contract which purports to be made by the association must in fact be made by one or more of its members because it itself is not a legal entity. If the association acts through member individuals or committees or any other delegated authority, then in most cases, those individuals are responsible to the person they deal with, for what they do in the name of the organisation.

A bond cannot therefore be set up in the name of the club or society. Although in theory it could be set up with the applying individuals being the personal owners, that may not be appropriate. Firstly, is it appropriate for the bond which has been funded from the association’s bank account to be owned by individual members? Secondly, from a provider perspective, there may be source of funds problems as the proceeds for a personal application would not be derived from a personal account, but instead from the association’s bank account.

If an association can have a bank account then logically it can own a bond? Not necessarily, as the circumstances are different – that account will have been set up by member individuals and the bank will simply look to those individuals to run the account.

Charities can be set up as charitable trusts or charitable companies. In either case, insurance bond investments are problematic.

Why is there a problem?

In brief, charities are not tax exempt bodies as such but instead qualify for a range of exemptions on various sources of income and gains. These can be compromised by bond investments leading to tax liabilities (unexpectedly) arising. HMRC have prepared this technical note which focuses on insurance bonds with a warning that “The tax implications can be complex for both the charity and its donors.”

If you’re unsure whether the organisation has charitable status

Firstly, ask the organisation for confirmation. It is however possible to do some ‘homework’ as the Charity Commissions throughout the UK each have a search facility on their homepages.

What should you do when you encounter a charity?

You may wish to refer to CC14 published by The Charity Commission “Charities and Investment Matters: A guide for trustees”.

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