Ex gratia payments: a practical guide for charities

Most charities will, at some point, face a situation where they feel morally obliged to make a payment even though they have no legal power to do so. These are known as ‘ex gratia’ payments.

We wrote recently about the long-awaited final provisions of the Charities Act 2022 (the 2022 Act), which regularise the rules for when and how such payments may be made.

This guide explores what ex gratia payments are, when they arise and how to handle them in practice.

What is an ex gratia payment?

Charities can generally only spend their money on furthering their charitable purposes.

But sometimes the trustees will feel they have a moral obligation to make a payment even though there is no legal power or authority to do so — for example, because a deceased donor clearly intended to change their will but never got round to it, or because a donor who has fallen on hard times asks for a gift back.

These situations are what we mean by ex gratia (or ‘moral’) payments. They crop up more often than you might expect — particularly in legacy administration, but also in other contexts where the trustees consider that fairness demands a payment to be made even though the charity is under no legal obligation.

When might an ex gratia payment be made?

Legacy cases are the most common trigger. A deceased person clearly intended to update their will — perhaps to include a new grandchild or to split a gift differently — but died before doing so. The charity receives the legacy, but the evidence suggests the donor would have wanted things done differently. Other situations include a donor asking for a gift back after falling on hard times or a charity wanting to compensate someone who has been inadvertently disadvantaged.

The Charity Commission’s updated CC7 guidance provides some helpful examples of ex gratia payments in legacy cases. However, a moral obligation to make a payment may also arise in other contexts. For example:

• A charity makes a payment to an employee whose exceptional service warrants recognition beyond their contractual entitlements. However, this would only meet the threshold if there were clear evidence of a moral obligation rather than simply a desire to reward good service
• A charity receives a bequest of personal effects, including items of local historical significance such as wartime memorabilia. The charity concludes it has a moral obligation to donate these items to a local museum where they can be preserved and displayed for the community, rather than selling them for the charity’s benefit.

Not every situation will justify a payment. Trustees should be rigorous in assessing whether a genuine moral obligation exists, rather than simply responding to external pressure or a sense that something ought to be done.

Ex gratia payments can also involve transferring or allowing use of property, not just monetary payments. When dealing with property, extra care should be taken not to exceed the value thresholds detailed below.

What has changed under the Charities Act 2022?

Smaller payments no longer need Commission consent. Before the 2022 Act, all ex gratia payments technically required the Charity Commission’s authority regardless of size. In practice, the Commission said it was “unlikely to challenge” payments of £1,000 or less made from a sense of moral obligation.

The 2022 Act has now regularised and extended this. Charities can make ex gratia payments up to the following limits without Commission consent, based on gross income in the last financial year:

These thresholds apply per payment, not per financial year. So, a charity with gross income of £200,000 could, in theory, make multiple payments of up to £2,500 each in the same year. However, care should be taken and each and every proposed payment needs to be considered on its own merits.

Anything above the relevant threshold still requires a formal application to the Commission.

One important caveat: if your charity’s governing document expressly restricts or excludes the power to make ex gratia payments, the statutory power will not override that restriction. Check your governing document before relying on the thresholds above.

Delegated authority

Previously, trustees themselves had to feel a moral obligation, which made delegation legally uncertain. The 2022 Act introduced an objective test, which means charities can delegate ex gratia decisions as with other governance arrangements — for example, to a legacy officer, a sub-committee or a senior member of staff — without worrying that the decision is invalid because the person making it is not a trustee.

Subjectively objective: satisfying the statutory test

A word of warning: the test under the 2022 Act is objective, not subjective.

The question is whether the trustees “could reasonably be regarded” as being under a moral obligation, not whether any individual trustee personally feels obliged.

This is an important distinction. A trustee’s private sense of guilt, sympathy or generosity is not enough. There must be evidence that a reasonable person, looking at the circumstances, would consider the charity to be morally obliged to make the payment.

If the evidence is not there, the payment should not be made, however strongly individual trustees (or proposed recipients) may feel about it.

Making it work in practice

If your charity is considering an ex gratia payment, here’s what to do:

1. Assess the evidence: trustees need to be able to point to clear evidence of a moral obligation. In legacy cases, this might be a draft will, a solicitor’s file note or a letter from the deceased. In donation cases, it could be correspondence from the donor or evidence of their changed circumstances
2. Work out whether you need consent: check your charity’s gross income in its last financial year against the thresholds above. If the payment falls within the limit, you can proceed without an application. If it exceeds the threshold, you will need to apply to the Commission before making the payment. Always remember to check your governing document for further restrictions on making ex gratia payments
3. Consider delegation: think about putting a clear delegation framework in place. This might involve authorising an officer or sub-committee to approve payments up to a specified limit, with a requirement to report back to the board
4. Record your reasoning: document the evidence you considered, the reasons for the decision, the amount paid and (where relevant) the delegated authority relied on. As well as being good governance, this will also help if you have to explain the payment to the Commission, auditors or beneficiaries later.

Key points to remember

The Charities Act 2022 has formalised and extended the approach charities can take to ex gratia payments. Smaller payments can now be made without Commission consent (within the thresholds) and decisions can be delegated through your usual governance structures. Keep in mind that you need clear evidence of a moral obligation, a proper decision-making process and a good record of why the payment was made.

And remember: you do not have to make a payment in every case. The framework gives charities clear grounds to say no when the evidence is not there.