A new charity investment vehicle, the Charity Authorised Investment Fund, will be introduced as an alternative to Common Investment Funds, today’s Budget has said.

Charities are currently able to invest through a tax-free vehicle known as Common Investment Funds, intended to provide several investment benefits to charities. However these suffer several problems. They are not regulated by the Financial Conduct Authority but the Charity Commission, which lacks investment expertise and is reluctant to authorise the creation of new funds, and the fact that unlike most investment funds, they are subject to VAT on fees, which is estimated to cost the sector £13m per annum.

The Budget document said: “The government is working with the Financial Conduct Authority, the Charity Investors’ Group and the Charity Commission to introduce a new Charity Authorised Investment Fund structure that will bring new investment funds established for charitable purposes under FCA regulation, ensuring they receive the same regulatory oversight and protections as funds for retail investors.”

The Charity Investors Group and Charity Law Association, which worked together on the proposals with the Treasury, the Commission and the FCA, said in a joint statement that the CAIF structure is intended to replicate the main benefits of CIFs, “including the tax benefits of being a registered charity; the ability to smooth income to aid cash flow budgeting for investing charities and the ability to have an independent advisory committee to represent charity unit holders”.

The 45 existing CIFs, which have combined investment assets of more than £13bn and around 13,000 investor charities, are expected to have the option to convert to the new structure.

The idea of a CAIF to replace the CIF structure was raised many years ago, but was not taken forward due to problems with the proposed structure.

The Charity Commission said it was pleased that the proposals were now going ahead, and that it was possible for the new funds to be registered charities – previously a sticking point in negotiations.

“Recently we decided in principle that authorised investment funds could be constituted and registered as charities in certain circumstances,” a spokeswoman said.

“These funds will need to have certain characteristics including being established for charitable purposes only for the exclusive benefit of charities, and must have the object of promoting the efficiency and effectiveness of charities by enabling participating charities to carry out their purposes more economically and efficiently by obtaining a broad spread of investment.”