Glossary
What are restricted funds?
Restricted funds are money a charity holds that can only be spent on the purpose the donor specified. Charity Commission guidance defines them as funds subject to specific trusts declared by the donors or with their authority. Most project grants are restricted and accounts report them separately.
Also called: restricted income, restricted grants, restricted reserves.
Restricted funds are money a charity holds that can only be spent on the purpose the donor specified. The Charity Commission's reserves guidance defines them as "funds subject to specific trusts, which may be declared by the donor(s) or with their authority". A grant for a named project, a donation for a particular appeal and income from a restricted fundraising event are all restricted. The Charities SORP, the accounting standard for charity accounts, requires restricted and unrestricted funds to be reported separately.
Why it matters when applying. Most project grants are restricted, which has two consequences. First, you cannot move money from one funded project to cover another's shortfall or your overheads, which is why full cost recovery matters when you set each project budget. Second, funders read your accounts to see how much of your income is restricted: a charity whose funds are almost all restricted has little room to absorb a shock, and the reserves policy they look for concerns unrestricted money only. Charity reserves in a grant application covers what to show.
In a funder's accounts. When you read a grant-making trust's accounts, restricted funds tell you whether the trust is free to fund what it likes. A trust whose capital is largely a permanent endowment, or whose funds are restricted to a named cause, cannot respond to a general approach however good the fit looks. How to read a grant-making trust's accounts shows where to find the funds note.
Example. A fictional youth charity receives a £20,000 grant restricted to a mentoring project. The project finishes under budget with £1,800 unspent. The money stays restricted until the funder agrees in writing to a new use or asks for it back, as described in what to do with unspent grant money.
Frequently asked questions
- What is the difference between restricted and unrestricted funds?
- Restricted funds can only be spent on the purpose the donor set, such as a named project or a particular cost. Unrestricted funds can be spent at the trustees' discretion on any of the charity's purposes. The Charity Commission's reserves guidance defines both, and a charity's accounts must report them in separate columns.
- Can a charity spend restricted funds on something else?
- Not without the donor's agreement. If a grant is restricted to a project and the project changes or ends with money unspent, the charity should ask the funder to vary the restriction or to accept the return of the balance. Spending it elsewhere is a breach of trust. Our guide to unspent grant money explains the options.
- Are all grants restricted funds?
- No. A grant is restricted when the funder specifies what it is for, which is the case for most project grants. A grant given towards the charity's general purposes, as some core and unrestricted grants are, is unrestricted income even though it came from a funder. The grant agreement decides, not the fact that it is a grant.