Tony Wickenden: Adviser essentials on trustee investment

Tony Wickenden

Over the past couple of weeks I have looked at the impact the dividend and capital gains tax changes will have on trustees. To continue with that theme I thought it might be a good idea to provide a summary of the fundamentals of trustee investment for advisers.

If you are to advise trustees on the investment of funds under their control (even if the reason  for engagement is the capital gains and dividend tax changes) it is essential you are familiar with the rules relating to trusts and their taxation.

Under the Trustee Act 2000 (and its equivalents in Scotland and Northern Ireland) trustees have certain responsibilities in connection with the investment of trust funds, including a duty to periodically review them and seek advice whenever doing so or making investments. These duties apply to all trusts, regardless of when they were created.

Advisers that operate in the trustee investment market need to understand the legal status of the trustees and the obligations imposed upon them. Advisers also need to be able to identify the type of trust they are dealing with, as this will impact on investment suitability.

Trustees of existing trusts seeking advice on the investment of the funds under their control are treated as one body for tax purposes (that is, they have one set of tax liabilities and one tax return under self assessment). However, they are treated as individuals for other purposes. This means any contracts (including investment contracts) made by the trustees of a particular trust are made by the individuals: for example, “X, Y and Z as trustees of the A trust”.

Before giving any advice to any potential investor an adviser should carry out a full fact find. When dealing with trustees the factfind must cover:

  • The type of trust, whether it was created during lifetime or on death, and its residence status
  • Details of the settlor and the beneficiaries, as well as the trustees, including their tax statuses
  • Details of the current trust investments
  • The objectives of the trust and reasons why the trust was created
  • The trustees’ investment policy
  • Requirements for income and/or capital growth
  • Attitude to risk

Establishing what type of trust you are dealing with will determine its tax treatment, which in turn will impact on the suitability of the proposed investment. Ideally, you should see the trust deed to satisfy yourself on the position.

When considering the investment of trust funds, income tax and CGT are of key importance. Any trust, whether created during lifetime or by will, will fall into one of the following categories, which will determine its income tax and CGT treatment:

  • Bare (absolute)
  • Interest in possession (flexible or life interest)
  • Discretionary

In addition, special tax rules may apply where the trust qualifies as one with a vulnerable beneficiary (for example, a disabled person or the minor child of a deceased).

For inheritance tax purposes there are different categories. Following the changes to trust taxation that took place in 2006, certain trusts are taxed in a different way depending on who created them, whether they were created on death (in a will) or during lifetime and whether they were created on, before or after 21 March 2006.

It is important advisers establish what powers the trustees have with regard to investment. The  first place to look is the trust deed or the will if the trust was created on death.

Most modern trust deeds will contain wide powers of investment permitting the trustees to invest largely as they please. There may also be some special powers or restrictions. In the absence of specific trust provisions statutory powers apply under the Trustee Act 2000 and its equivalents in Scotland and Northern Ireland, subject to satisfying certain investment criteria.

But while trustees of most modern trusts will be permitted to make a wide range of investments, there are certain statutory obligations to which they must adhere to investing trust monies. These include a duty of care, a duty to have regard to the need for diversification and the suitability of any proposed investments to the trust (known as the “standard investment criteria”), a duty to periodically review the trust investments and a duty to obtain and consider proper advice when making or reviewing investments.

Advisers then need to consider taxation, which I will deal with next week.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn