Trusts explained: understanding key responsibilities and obligations for trustees

In the world of financial planning, trusts are a powerful tool that offer significant benefits in managing and protecting wealth. By establishing a trust, individuals can ensure that their assets are managed according to their wishes, while also providing for future generations. Trusts are not just for the wealthy; they are a versatile instrument that can be utilised in a variety of situations, from estate planning to providing for minor children, and supporting charitable causes.

However, with these benefits come significant responsibilities, particularly for trustees, who must navigate a complex legal landscape to fulfil their duties. To help shed light on these responsibilities, we turn to insights from James Mabey , a partner at Winckworth Sherwood LLP , who brings extensive expertise in trust law. Understanding the role of a trustee, the requirements of trust registration, and the implications of trustee taxation is crucial for anyone involved in or considering the creation of a trust.

What are the key responsibilities and duties of a trustee?

A trust is a common law concept which separates two forms of ownership (legal and beneficial).

Under the terms of a trust, the party creating the trust (the “settlor”) gives another party (the “trustee”) the right to hold title to and manage property or assets for the benefit of a third party (“the beneficiary”).

This creates a fiduciary relationship between the trustees and the beneficiaries.

In the case of trusts, a trustee’s fiduciary duties are guided by common law and equitable principles.

The over-arching principle is that the trustee must exercise a duty of loyalty to the beneficiary – ultimately, this means only acting in their best interests. It is a very strictly construed duty and places an onerous burden on the trustee. A trustee must ensure that they never put themselves in a position where their personal interests conflict with their role as a trustee (or in a position where there is a possibility of conflict). Trustees must also ensure that they never profit from their office as trustee.

The consequences for breach of fiduciary duty can be severe, and any party who is asked to undertake the role of trustee must familiarise themselves with their duties and responsibilities, seeking independent legal advice if necessary.

What is trust registration, when is it required, and how is the process carried out?

All “qualifying” trusts are now legally required to be registered with the Trust Registration Service (“TRS”). Previously, trustees were only required to register a trust with the TRS in instances where they were exposed to UK tax.

Since the implementation of The EU 5th Anti-Money Laundering Directive in 2020, the following trusts now need to register on the TRS:

• All UK “express trusts” (even if they do not have UK tax exposure, and still including those which do);
• Non-UK trustees of express trusts which acquire UK real estate (after March 2020); and
• Non-UK express trusts, with at least one UK resident trustee, which form a “business relationship” in the UK.

Trusts that are created on or after 4 June 2022 will need to register within 90 days of creation. Trustees must register via the TRS system through HMRC’s online portal, which requires the setting up of a Government Gateway account.

“Express trust” is a term that has the potential to be interpreted very widely, and so the Regulations set out a list of types of trusts which are excluded from registration, including (but not limited to): co-ownership trusts, UK charitable trusts, registered pension funds, and life policy trusts. These are all common sense and practical exclusions, which mean that the TRS will not be overwhelmed with registrations.

Certain will trusts and life insurance policy trusts wound up within 2 years of death are also excluded from registration. Individuals often use trusts in these scenarios to help preserve some confidentiality and provide flexibility to their families without the intention for the trusts to continue after their death for a long period of time. They also have the advantage of avoiding the additional burden of needing to be registered with the TRS.

How does trustee taxation differ from personal taxation, and what are the key considerations?

The tax considerations of a trust will depend on the type of trust being created and whether it is established during a settlor’s lifetime or on death.

Lifetime Trusts

There is an immediate inheritance tax (“IHT”) “Entry Charge” on the settlor for the creation of most types of lifetime trust. The amount which is taxed subject to IHT is any value of the trust property which exceeds the threshold of the settlor’s ‘nil rate band’ (i.e. tax-free allowance).

This is taxed at a rate of 20%. Should the settlor die within 7 years of the transfer, there could be an additional charge.

When the settlor adds property into the trust after it has been created, each transfer will be deemed as a market value disposal for capital gains tax (“CGT”) purposes. There are ways to mitigate this, for example by claiming ‘holdover relief’.

Trustees (of trusts which fall under what is known as the relevant property regime) will also be subject to IHT charges of up to 6% on the 10-year anniversary of the trust’s creation, and a final charge that is pro-rated on the final distribution of capital to the beneficiaries of the trust (“the Exit Charge”).

Any gain on the termination of the trust will be a deemed disposal at market value by the trustees and therefore subject to a further charge of CGT (unless there is a relevant relief).

Will Trusts

Most will trusts are taxed differently. For instance, “life interest” will trusts are treated as though the underlying capital belongs to the life tenant (the beneficiaries entitled to the income of the trust).

Trustees of these trusts are subject to basic rate income tax before net income is paid to the life tenant. The life tenant, on receipt of the funds, declares the income on their personal tax return.

Ensuring success in trust management

Trusts play a vital role in financial planning, offering both flexibility and security for managing assets. However, the responsibilities of a trustee are substantial, and the legal obligations associated with trust registration and taxation can be complex. It is essential for trustees to be fully informed and, when necessary, to seek expert advice to ensure they are meeting their duties and protecting the interests of the beneficiaries. As the regulatory environment surrounding trusts continues to evolve, staying informed and compliant is more important than ever for those involved in trust management. By doing so, trustees can uphold the trust’s purpose and ensure its long-term success in achieving its objectives.