Benefit and Prejudice: varying a trust in England/Wales or Scotland
It is a truth universally acknowledged (by trustees and trust lawyers, anyway) that a trust deed may not always do what they need it to. What, then, are trustees to do?
The 'rules' governing any individual trust are set out in the trust deed. However, trustees sometimes find that they want to do something—often for tax purposes—which the trust deed does not permit. In those circumstances they may wish to 'vary' the terms of the trust.
There are different ways in which this can be done, and these are different in England/Wales and Scotland.
In this article, we highlight the ways a trust can be varied, focusing in particular on applications to court to vary trusts under two different Acts in England and Scotland and the differences between the two legal systems.
Why vary a trust?
There are probably as many reasons trustees might want to vary a trust as there are trusts, but at WBD, we most often advise trustees who want to do this either to protect the beneficiaries—perhaps because they are not ready to receive large amounts of capital at the age set out in the trust—or for tax planning purposes—perhaps to delay the distribution of assets and thus prevent a Capital Gains Tax charge arising.
How may a trust be varied?
In England and Wales (which share a legal system) a trust may be varied in one of five ways:
- The beneficiaries may agree between themselves: if they (including all potential beneficiaries) all exist, have mental capacity and are over the age of 18
- The court has 'inherent jurisdiction' to vary trusts in limited circumstances
- Trustees can be given management or administrative powers not otherwise granted to them in order to complete 'expedient' transactions under section 57 of the Trustee Act 1925
- An Act of parliament deals specifically with variation of Settled Land Act Trusts (a very particular type of trust mentioned here only for completeness)
- Under the Variation of Trusts Act 1958 (the 1958 Act).
In Scotland there are four main ways:
- With the agreement of all the beneficiaries (similar to the position in England)
- Under a power given to the trustees by the trust deed itself
- Using the limited provisions of the Trust (Scotland) Act 1921 although this does not extend to full-scale variation
- Under the Trust (Scotland) Act 1961 (the 1961 Act). This is the Act which formally gives the court powers to vary a trust.
In reality, most trusts are varied either under the first or last points in each of these lists. Either all the (adult) beneficiaries jointly agree to change the trust, often to wind it up, or an application to court is made under one of the two Acts.
Variation in England and Scotland under the 1958 and 1961 Acts
Broadly speaking, each Act allows the court to approve a variation of a trust on behalf of a beneficiary who cannot themselves approve it, perhaps because they have not been born, are too young, (note, that in Scotland this means under 18, albeit the age of majority is usually 16) or at this stage do not have an actual interest in the trust, but just a hope or expectation that they will in the future.
There are two key differences between the two systems:
In England/Wales, the variation cannot be a complete 'resettlement' and there must be a 'sub-stratum' of the original trust remaining. In other words, trustees cannot entirely rewrite the whole trust. Scotland however has no such concerns, and a complete resettlement is permitted, provided, of course, the crucial rule on benefit/prejudice below is followed.
Benefit and Prejudice
The court can only approve a variation—of whatever type, if,
- In England/Wales it is for the benefit of the beneficiaries
- In Scotland it is not prejudicial to them.
The question then is: what constitutes a 'benefit' and what is 'not prejudicial'?
The benefit must accrue to all the beneficiaries/potential beneficiaries (including the unborn). It is often financial, although it can also be educational or social. Indeed, a financial benefit can be outweighed by a perceived social or educational disadvantage. In 1969, a suggestion that a trust should be varied for clear financial benefit was turned down by the court because the family would have to move to Jersey. The judge said:
"There are many things in life more worthwhile than money. One of these things is to be brought up in this our England, which is still ‘the envy of less happier lands’'.
Jersey was clearly a wilder place back then.
As for Scotland, until recently there was limited evidence as to the meaning of 'not prejudicial'. However, it was generally limited to financial considerations—so social or other benefits were not relevant. As a result, the English approach was generally seen as wider.
However, the question was recently considered by the Scottish courts. The trustees of a trust wanted to add a life rent (life interest) for a wife to follow that of her husband. The thinking behind this was to avoid the risk of the (four) children receiving large sums at a young age if their father died while they were still young. This would delay vesting in the children (as they would not receive the capital until both their parents had died) but the court held that this was not prejudicial because they would still receive the capital (albeit possibly at a later date) and there were other clear advantages to them, including the possibility of avoiding a large tax bill on their father's death, and using their mother's life interest for tax planning. The court said:
"The questions of absence of prejudice should not be considered too narrowly but rather against the whole circumstances of the trust."
It is interesting that in considering both the question of benefit/prejudice and a subsequent request by the trustees for anonymity (which was not granted) the court seems to have been influenced by decisions of the English court. For now, at least, the two sets of rules seem to be moving closer together.
The Trusts and Succession (Scotland) Bill, currently going through the Scottish Parliament, will bring a number of Scots' trusts issues up to date (replacing, in the main, the century-old 1921 Trusts (Scotland) Act). If and when enacted, the new Bill will (among other things) replace the statutory power to vary trusts currently included in the 1961 Act and will make it clear that the court can consider 'economic or other benefit' when considering if an arrangement is prejudicial.
The ability to vary a trust in both jurisdictions is a very useful tool for trustees wanting to protect beneficiaries or minimise tax and our trusts experts in both Scotland and England are well placed to advise both trustees and beneficiaries on this.