Ignoring a Trust? Why UK Trustees Must Act Now to Avoid HMRC Penalties

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.