HMRC updated their compliance requirements for trustees in May 2020. In addition to the initial registration on the Trust Register, trustees must now complete an annual online declaration to confirm that no details about the trust have changed. If a change has occurred, for example if a trustee has moved house, then HMRC need to be informed via the online system. Failure to register the trust or complete the annual declaration will result in penalties.
As people’s family and financial lives become ever more complex, a trust is often proposed by legal and financial advisors as a solution to protect assets, mitigate tax and ensure equality for family in division of estates. The person who creates a trust whether in lifetime or by Will is known as the Settlor. A great deal of time and thought is usually put into the creation of the trust by the Settlor. Consideration is given most particularly as to who’ll benefit from the trust, and what assets should be included. However, often less consideration is given to the appointment of Trustees and they’re often appointed without enough consultation or understanding of the role.
Trustees have a legal and fiduciary duty to the beneficiaries of their Trust. They’re responsible for making appropriate investments, balancing the needs of beneficiaries and ensuring that the Trust is compliant with all its statutory obligations. In recent years, these obligations have become increasingly challenging.
The Trustee Act 2000 introduced a requirement for Trustees to take professional financial advice in relation to making investments, and also requires an adherence to standard investment criteria which is applicable to trusts as defined in the Act. For a Trust which is relatively small, the potential costs of taking and implementing professional financial advice could end up being disproportionate to the size of the trust fund itself and leave the Trustees exposed to a charge of poor financial management; failure to take such advice however could provoke a similar accusation.
When making investments Trustees need to be mindful of the tax implications which result. Trusts are taxed as separated entities with their own tax rates and regime. Trustees may need to file annual tax returns if the trust realises an income or capital gains tax liability. Such trusts will also require registration on HMRC's trust register which was introduced in 2017 and is designed to capture a wide range of personal information about settlors, trustees and beneficiaries including details which may not be readily to hand such as dates of birth and National Insurance numbers. If the trust has beneficiaries or trustees who live overseas then the passport details are required. All this adds up to a time consuming and often challenging exercise for trustees.
Trustees should consider carefully whether they wish to accept an appointment when asked by the settlor to act. The burden of compliance should not be underestimated and getting something wrong can lead to a claim for breach of trust and a personal liability may ensue.
In the recent case of Nicola Mackay [Mackay v Wesley 2020], Nicola accepted a position as trustee of a family trust and then agreed to a complex tax planning scheme in order to mitigate a substantial capital gains tax liability. Unfortunately HMRC challenged the scheme, deeming it to be tax avoidant, and it failed; as the trust no longer has any assets, Nicola now faces a £1.6m personal tax liability. She sought to have her appointment rescinded by the court on the grounds that she didn't understand what she was signing and that she was under undue pressure from her father. Unfortunately, the court didn't agree and her appointment and the liability still stand.
There's a lot to learn here if you're looking to take on a first-time trustee role, but the basics can be distilled to this: before accepting a trustee appointment, be certain that you understand the legal and fiscal requirements of the role and if in any doubt, take professional advice.
There's a lot to learn here if you're looking to take on a first-time trustee role, but the basics can be distilled to this: before accepting a trustee appointment, be certain that you understand the legal and fiscal requirements of the role and if in any doubt, take professional advice, or simply decline.
Published: June 2020
A monthly briefing from Irwin Mitchell
June 2020
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