Trusts can be a very useful tool for individuals and families to protect assets, pass wealth down the generations in a controlled manner, and provide tax planning benefits.
However, for a Trust to provide those benefits, it must be actively managed.
The rules, regulations and ever-changing compliance surrounding trusts can cause many individuals to turn a blind eye to the Trust, but burying your head in the sand will only make matters worse, our Trust Solicitors explain.
What is a Trust?
Although Trusts can often be presented as being intimidatingly complex, the fundamental concept is that a Trust exists when the legal owner of an asset is different to the beneficial owner.
For example:
- Mrs X leaves £300,000 to a discretionary trust. Her son and daughter are the trustees, and her bloodline descendants are the beneficiaries. The son and daughter are the legal owners of the money holding on trust for all the children, grandchildren and further descendants as the potential beneficiaries.
- Mr M is married and has 1 son and 2 daughters. Mr M died and left Myerson House to Mrs M and his son as trustees to hold on Trust to allow Mrs M to reside there for her lifetime, after which Myerson House will pass to his three children. The legal owners are Mrs M and the son , and the beneficial owners are Mrs M for her life and then the three children.
What should I have been doing as a Trustee?
Trustees have legal and fiduciary responsibilities to manage trust assets responsibly and to act in the best interests of the beneficiaries.
Broadly speaking, a Trustee should be carrying out the following:
- Reviewing the terms of the Trust at least annually;
- Protecting Trust assets;
- Obtaining suitable financial advice;
- Attending to Trust tax reporting and payment;
- Liaising with and reporting to the beneficiaries;
- Attending to compliance matters such as registering with HMRC’s Trust Registration Service;
- Preparing annual Trust accounts;
- Holding an annual trustee meeting;
- Preparing and ensuring safe custody of Deeds, minutes and resolutions.
Depending on the type of Trust and the nature of the assets, there may be additional requirements too.
I haven’t been actively managing the Trust. Does this matter?
In short, yes, for the following reasons:
Personal liability
A Trustee can be held personally liable for losses resulting out of a breach of their duties.
This could mean a trustee would have to pay compensation out of their own personal assets for any loss that has arisen by their inactivity.
There may be family disputes and contentious proceedings to engage in which in itself, can be a difficult and costly process.
It is important to take advice as soon as possible to protect yourself from risk of personal liability and prevent family fallouts.
Interest and penalties on unreported and unpaid tax
If the Trust is obliged to report tax (whether income, capital gains or inheritance tax) to HMRC, penalties can arise for failure to report and pay within the deadlines. Interest on the unpaid sums can also be charged at HMRC’s punitive rate.
These penalties can arise on 6-month and 12 month delays with the latter being up to £3,000 and daily penalties of up to £60 a day can then be imposed.
It is important to report and pay tax to HMRC on time to avoid these costs or, failing that, to seek remedial action urgently to prevent further escalation of the sums due.
Penalties for failure to meet compliance obligations
The compliance surrounding Trusts is increasingly onerous with changes being sprung upon Trustees such as the new requirement for certain Trusts containing discretionary fund managed assets to register for Automatic Exchange of Information with HMRC by 31 December 2025. A £1000 penalty could be charged for failure to register.
Another example is that most express UK Trusts now must register with HMRC’s Trust Registration Service. Failure to do so could result in a penalty of up to £5,000.
HMRC may only charge these penalties if a Trustee fails to comply after HMRC issues a notice, but this is not a guarantee. Trustees need to act now to show their intended cooperation with HMRC and should consider seeking advice about their obligations now and in the future to help reduce the likelihood of any such penalties arising.
Missed opportunities
The job of a Trustee is to act in the best interests of the beneficiaries. By not actively managing the Trust, there is the potential to miss tax-saving opportunities or to miss the opportunity to generate a better outcome/return.
Further, a Trust is set up for the benefit of the beneficiaries. If the Trust isn’t actively managed, the Trust's purpose may be overlooked. Beneficiaries may miss out on the opportunity to receive the financial support that was intended for them and the Trust may become redundant.
Unprotected assets
Finally, if the Trustees are not engaging in the Trust administration, the assets are no longer protected. A bank account may be losing value rather than keeping up with inflation, investments may be taking a hit based on market conditions, and property may be falling into disrepair. This is going to result in a loss to the Trust and the beneficiaries which, ultimately, they can turn to the trustees to compensate them for.
I need some help with a Trust. What should I do?
By continuing to look the other way when it comes to a Trust, this will only worsen the problem.
Our Trust Solicitors can work with you to help to identify the outstanding actions, bring the Trust compliance up to date and seek to reduce and prevent further escalation of any penalties. Trustees are entitled to seek legal advice for this assistance and for their reasonable costs to be paid by the Trust.
If you’re unsure where to start with the process, we would suggest collating the following and sending this to our Trust specialists who can work with you throughout the process:
- A copy of the Trust Deed;
- Copies of any supporting Trust documents; and
- A list of the Trust assets and their value
Need help with a trust?
If you are a trustee and are unsure whether a trust has been properly managed or kept compliant, our experienced Trust Solicitors can help.
Our Wills, Trusts and Probate Team can review the position, identify any outstanding obligations and support you in bringing the trust up to date while helping to reduce the risk of penalties and personal liability.
0161 941 4000
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Hannah Owens
Associate
Hannah has 2 years of experience acting as a Wills, Trusts, and Probate solicitor. Hannah assists clients in dealing with taxable estates including cross-border estates, Trusts and estate planning, as well as advising on Court of Protection applications and Powers of Attorney.
About Hannah Owens