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Och aye the new trust rules

The subject of trustee investments has crossed the mind of many an adviser over the years. Especially for those seeking to do business with other professional advisers, working in this market seems like a classic case for effective collaboration. And it is, but it is not easy.

The adviser needs to keep up to date with the tax and legal context of trustee investments while the accountant or solicitor needs to be receptive to learning about the development of investment business for the trust.

Changes to the taxation of discretionary and accum- ulation and maintenance trusts have opened up an opportunity for UK advisers to promote the importance of running a trust audit.

It would seem to make sense as these trusts have seen two important changes – one that means that the first 500 of income is only taxed at the standard rate and another that means that all income above this level is taxed at 40 per cent or 32.5 per cent for dividends, as are all capital gains.

The first change means that no further tax will be due on most income – savings income and dividends, for example – received with a tax credit. But there will also be no tax credit reclaim. The second change, implemented in 2004, means that discretionary and A&M trusts have become higher-rate taxpayers.

While tax planning is not the be all and end all of investment planning – how can it be? – it is nevertheless important. If an individual investor becomes a higher-rate taxpayer, this is likely to be a trigger for a review of their investments to see whether they are still appropriate. So why not with trusts?

So much for tax. How about other changes? Well, the Trustee Act 2000 has changed some investment parameters in England and Wales. Broadly speaking, the act has removed imped- iments to investing where a trust was constrained by statutory investment provisions. It has also made statutory some previous common law duties and responsibilities – notably, the need, subject to some exceptions, to seek advice before investing.

So how about Scotland? Well, the Charities and Trustee Investment (Scotland) Bill was introduced in the Scottish Parliament in November 2004 and received Royal Assent in July. We are still awaiting the commencement order but the enactment of the bill is good news indeed.

The new Charities and Trustee Investment (Scotland) Act 2005 extends the general powers of trustees along lines similar to those contained in the Trustee Act 2000 in England and Wales, subject to the satisfaction of the standard investment criteria. The legislation takes effect by amending section 4 of the Trusts (Scotland) Act 1921 and repealing certain provisions of the Trustee Investments Act 1961.

I am grateful to my colleague, Barbara Gardener, for providing me with the following summary of the new provisions.

Section 93(2) CTI(S)A amends section 4 of the Trusts (Scotland) Act 1921 by adding a provision allowing a trustee to make any kind of investment of the trust estate, including an investment in heritable property. The effect is that trustees will generally have the same powers of investment as if they were the beneficial owners of the trust estate. Subsection (2) also provides a new wide power for trustees to acquire heritable property for any other reason. These wider powers are subject to any restriction or exclusion imposed by other enactments and do not extend to certain categories of trustees (subsection (3)).

Subsection (3) of section 93 continues the policy of the Trustee Investments Act 1961 in relation to pre-existing trust deeds. No term in a private trust deed made before the passing of the 1961 act was to restrict the investment powers granted to trustees by that act. The new general power in subsection (2) is similarly not to be restricted.

In relation to trust deeds made after the passing of the 1961 act, where the investment powers contained in the 1961 act are conferred, the trustees are to have the new general powers.

But if trustees in existing post-1961 act deeds or in future deeds are prohibited from making certain investments, these prohibitions will continue to apply. This is because section 4(1) of the 1921 act, in which the new general investment power is inserted, authorises only acts which are not at variance with the terms and purposes of the trust.

Section 94 CTI(S)A includes a number of provisions dealing with the exercise by the trustees of their power of investment. The first of these will appear as a new section 4A of the Trusts (Scotland) Act 1921 and covers the duties that trustees must follow before exercising the wider investment powers under section 93(2).

They include the duty to have regard to the suitability to the trust of the proposed investment and the need for diversification. These are identical to the standard investment criteria used in the Trustee Act 2000.

There is also a duty (as under the Trustee Act 2000) to obtain and consider proper advice before exercising the power of investment and when reviewing the investments of the trust. The meaning of “proper advice” and the exception to the rule are similar to their English equivalent.

Schedule 3 makes a number of consequential amendments to other legislation relating to powers of trustees.

New Section 4B of the 1921 act (also introduced by section 94 CTI(S)A) will deal with the trustees’ power to appoint nominees and new section 4C with the power to delegate investment management functions. Again, these provisions are similar to their English equivalent.

As stated earlier, trustees in the rest of the UK have had wide investment powers for some time now under the Trustee Act 2000 and the Trustee Act (Northern Ireland) 2001. Therefore, the provisions in the new act, which will benefit trusts in Scotland which do not have adequate investment powers in their trust deeds, are clearly welcome.


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