The Trusts and Succession (Scotland) Bill is making its way through the Scottish Parliament and, if enacted, will mark the first major change to Scottish trust law in over 100 years, the last major piece of legislation being the Trusts (Scotland) Act 1921. Trust law in England & Wales is not much more up to date, with the main piece of legislation dating back to 1925. Although there are similarities in the trust law of both jurisdictions, there are a number of differences which will be relevant to individuals and their families with affairs both north and south of the border. Some of the key differences include:
Trustees are responsible for the management of the trusts and will have a range of powers, stemming from the trust deed, common law and the relevant trust legislation. These powers could range from making decisions regarding the day-to-day management of the trust assets, to deciding whether to make income or capital payments to beneficiaries. The default rule in Scotland is that trustees are to act by majority, whereas in England & Wales trustees are to make decisions unanimously. In both cases, the trust deed or Will can change the default position. This point can be particularly relevant if there is a risk of disagreement between the panel of trustees (in which case a “majority” provision might avoid deadlock) but similarly there may be key decisions where trustee unanimity is felt to be important. The new Bill will clarify the existing “majority” rules by providing that a trustee decision will be binding when it is made by a majority of the trustees “for the time being able to make it” and so will not include trustees who have become mentally incapable.
At present, significant complications can arise where a trustee under a Scottish trust loses capacity and in many cases they will need to be formally removed by the court. Legislation in England & Wales allows the other trustees to replace the incapacitated trustee, potentially avoiding significant court expenses. The new Bill will allow trustees of Scottish trusts to remove an incapacitated trustee in many cases, which is a welcome change and should avoid court processes in many cases.
With certain types of trusts, trustees can decide whether to pay income directly to beneficiaries or instead to “accumulate” it within the trust structure. In Scotland, the present rules (broadly) allow for a maximum accumulation period of 21 years from the date of the trust or, in the case of a trust established under a Will, for 21 years from the individual’s death. In England & Wales, following specific legislation introduced in 2009, no such restriction applies to the vast majority of lifetime trusts or trusts arising under Wills. The new Bill will remove the existing restrictions in Scotland in the case of any new trusts and also to a number of existing trusts where this was “specifically anticipated” in the trust deed.
A well-drafted trust deed will contain detailed provisions regarding the trustees’ ability to pay capital over to beneficiaries. If there is no such power in the trust deed, then a very limited power is available under the existing Scottish trust legislation, which requires the authority of the court. In England & Wales, a much wider statutory provision applies which allows trustees to pay capital to beneficiaries for their advancement or benefit. The new Bill will significantly extend a trustee’s ability in Scotland to advance capital to a beneficiary where this is not specifically prohibited in the trust deed.
Trust termination date
Scottish trusts are not subject to a specified time limit unless this has been included in the trust deed. Conversely, trusts established under English & Welsh law are limited to a maximum period of 125 years. In practice, this is unlikely to be an issue for short to medium term family trusts but can be an issue for multi-generational trusts and can lead to significant capital gains tax and inheritance tax implications.
The Trusts and Succession (Scotland) Bill is currently at “Stage 3” in the Scottish Parliamentary process and MSPs can propose further amendments, so things could still change from here. However, as currently drafted, the Bill provides a welcome update to Scottish trust law and is expected to become law in 2024. For individuals with Scottish and English links, careful consideration of the pros and cons of the trust law under both jurisdictions will be key.
David Mowlem is a Partner in our Private Client team and is dual qualified in Scottish and English law. If you would like to discuss any of the trust law points raised in this article please get in touch.