The Charity Commission is proposing to allow trustees of endowed trusts and foundations to adopt a total return approach to their investments without needing to seek the regulator’s permission.

A consultation published today outlines how the Commission plans to implement the relevant section of the Trusts (Capital and Income) Act to give charities more freedom to decide their own investment policy.

An investment portfolio that is managed on a total return basis takes into account not only the capital appreciation - the change in the market price of an asset - but also the income received on the portfolio. This income typically consists of interest, dividends, and securities lending fees.

In this way, investors can manage their investments to make the most of the return they generate, regardless of the form the income takes. And because the return is not labelled as either income or capital, trustees can allocate it in the way they consider will best further the charity’s purposes, for now and in future.

Under current rules, charities can only invest their endowment on a total return basis if they first seek permission from the Charity Commission.  And even if permission is granted, trustees are still not allowed to add any part of the total return to the permanent endowment.

But under the new proposals, trustees will be able to invest on a total return basis without the Commission’s consent, as long as they comply with safeguards contained in the regulations.

The regulator is not proposing to impose a limit on the amount of unapplied total return that can be allocated to income and spent on a charity’s aims.  However, it is inviting charities to give their views on whether a limit would be useful.

They would also be able to allocate a limited amount of their capital to the trust for spending.  The Commission proposes capping this at 10 per cent, and invites views on this.  The consultation states: “This would allow trustees more flexibility to release funds for current use if they decide it would be in accordance with their duty to further the charitable purposes now and in the future.”

A 10 per cent limit would “give trustees a greater ability to react to changing financial market conditions if they need to without allowing the capital fund to be expended”.

However, if they do spend any of the endowment they must repay it at a rate and over a timescale that they deem appropriate.

Jane Hobson, the Commission's head of policy, said: "The Commission promotes the effective use of charitable resources by encouraging charities to be self reliant – letting charities make decisions which they are best able to make.

"We think that the new legislation and the regulations when they are made will contribute to giving trustees the freedom to act in the best interests of their charity."

The consultation will run until 20 June 2013. The document can be found on the Commission's website here.