03.06.26

Common Trustee Mistakes: What You Need to Know to Stay Compliant with UK Trusts

Being a Trustee is a significant responsibility and getting things wrong can come at a cost. Trustees can be personally liable to compensate the Trust for any loss caused by making mistakes, such as missing deadlines and incurring penalties.

Regulations are constantly changing, making it harder than ever for Trustees to be assured that their Trust is compliant. This piece aims to draw attention to some of the common mistakes that Trustees make and how the team at Renaissance Trust can help.

Understanding the type of Trust

There are several different types of Trust, all of which have a different structure and purpose. Some common types of Trusts include:

• Discretionary Trusts
• Disabled Person’s Trusts
• Interest in Possession Trusts (often called Life Interest Trusts)

Trustees must ensure that they understand the type of Trust that has been created. Failure to understand this may lead to a number of problems down the line, such as incorrect tax treatment, and making payments incorrectly. Professional advice may need to be taken if there is any doubt as to the type of Trust that is in place.

Knowing what powers the Trustees have

Trustees must ensure that they familiarise themselves with the Trust document in order to understand what powers they have in relation to the Trust. The Trust document may give or restrict the Trustees’ powers and not being aware of the terms of the Trust may lead to an unintentional breach of Trust if the Trustees act outside of the scope of their powers.

Understanding who the Beneficiaries of the Trust are

Knowing who the Beneficiaries of the Trust are is essential. Making a payment to somebody who is not a Trust Beneficiary is a breach of Trust and the Trustees could be personally liable to compensate the Trust for any loss arising in these situations. For example, if the Beneficiaries of the Trust are the nieces and nephews of the Settlor, the Trustees will need to ensure that they identify those who meet that description. In some cases, this may require the services of a genealogist to identify any living members of this class.

Considering the needs of the Beneficiaries

Depending on the type of Trust, the wording of the Trust document and the contents of the Letter of Wishes, Trustees may have a duty of care to consider the needs of all Beneficiaries when they are making decisions. Failure to have regard to the best interests of all of the Beneficiaries, may lead to scrutiny if the Trustees unfairly favour one Beneficiary over the others without a justifiable reason to do so.

Considering the needs of Beneficiaries can even include considering the interests of unborn Beneficiaries. As an example, it is common for Discretionary Trusts to have a very wide class of Beneficiaries, such as the children and remoter issue of the Settlor born before the end of the Trust Period. Some Trusts can last up to 125 years, so this could potentially include a number of future generations. The Trustees would, therefore, need to consider the interests of current and possible future generations when making decisions about the Trust.

Documenting Trustee decisions

Trustees have a legal duty to keep records regarding the administration of a Trust. They may make a number of decisions in the day to day running of the Trust, such as:

• Agreeing or declining to distribute funds to a Beneficiary
• Approving the Annual Trust Accounts
• Reviewing the performance of the Trust investments

When making these decisions, the Trustees should document their decisions and their reasoning. The easiest way of doing this is by preparing a Trustees’ Resolution that sets out what was discussed and the decision that was made. This does not need to be in any particular style or format, but it is advisable that all Trustees sign this to confirm that the decision was made collectively.

Keeping accurate financial records

Trustees have a duty to maintain accurate financial records. This includes keeping records of distributions made to Beneficiaries, professional fees, payments of tax and the payment of Trustee management expenses.

The best way to ensure that adequate records are maintained is to prepare a set of Annual Trust Accounts. This allows the Trustees to see the full picture of the Trust’s financial position, and make distributions in the most tax efficient way. Having a full understanding of the Trust’s financial position gives Trustees the peace of mind that making payments to the Beneficiaries will not cause any adverse tax consequences.

HMRC’s Trust Registration Service (TRS)

Since September 2022, most types of Trust are required to register on HMRC’s TRS. There are a few exceptions to this requirement, and Trustees should familiarise themselves with HMRC’s guidance to ensure that the Trust is correctly registered where required.

On an ongoing basis, Trustees must make sure that all of the information on the TRS is complete, accurate and up to date. Any changes to the information on the Register must be made within 90 days.

Trustees of tax-paying Trusts must also make an annual Declaration to confirm that the information held on the Register is up to date. Box 20.1 of the annual Trust Tax Return serves as a reminder of this requirement, as Trustees are required to tick to confirm that this has been done.

Failure to comply with any of HMRC’s requirements can lead to financial penalties of up to £5,000.

Tax reporting and deadlines

Making a mistake as to the type of Trust in place means that the Trustees may mistakenly apply the wrong tax treatment for Income Tax, Capital Gains Tax and Inheritance Tax. This could lead to penalties from HMRC, and interest on any late payment of tax.

Trustees must ensure that they are aware of the tax filing deadlines that they must follow in relation to their particular Trust. For example, Trustees of Discretionary Trusts may need to report to HMRC within six months of the end of the month of the Trust’s ten year anniversary.

A common mistake that Trustees make relating to Income Tax is failing to understand the Trust’s Tax Pool. Failing to understand how the Tax Pool works can lead to the Tax Pool being overdrawn and additional tax becoming due HMRC.

Managing Trust investments

As we explained in our earlier blog, Trustees have a number of duties of care to consider when managing Trust investments. Importantly, they should ensure that they are familiar with the investment powers (or restrictions) that they have according to the Trust document.

An investment strategy should be chosen that is suitable for the kind of Trust that is in place. For example, in the case of an Interest in Possession Trust, the Trustees need to consider the both the interests of the Life Tenant, who is entitled to income during their life, and the remainder Beneficiaries, who are usually entitled to the capital when the Life Tenant dies. These two kinds of Beneficiaries may have competing interests, which Trustees must bear in mind when making investment decisions.

An Investment Policy Statement (IPS) should be adopted to formally document the agreement between the Trustees and their chosen investment manager. Amongst other things, the IPS sets out the aims and objectives of the Trust investments, any investment restrictions imposed on the Trustees and the benchmarks against which the performance of the investments will be monitored. Failure to implement an IPS may expose the Trustees to liability for the actions of the investment manager.

Trustees must regularly monitor the performance of the investments in line with the benchmarks established in the IPS. This process should be documented so that the Trustees can evidence that they have complied with their duty of care.

How can we help?

Our specialist team can assist Trustees with all aspects of Trust administration and compliance matters. We can also be appointed as a Corporate Trustee. Where Renaissance Trust is appointed as a Trustee, we deal with all of the administrative and regulatory aspects of running a Trust, giving family members peace of mind that their Trust is managed with the highest level of expertise.

If you are a Trustee seeking advice or if you may wish to consider appointing us as a Trustee, please get in touch to discuss how we can help.