technical factsheet
Trustee Act 2000
– Business Opportunities
Overview
The trustee investment market has always been a
lucrative source of lump sum business. Investments
such as investment bonds, OEICs, unit trusts
and investment trusts are particularly popular as
underlying assets of trusts.
The Trustee Act 2000 expanded this market by
removing the outdated investment powers imposed
upon certain trustees by the Trustee Investments Act
1961. The new legislation also introduced a statutory
duty of care for trustees to follow when making
investment decisions.
This factsheet looks at the key elements of the Trustee
Act 2000 and the ongoing business opportunities that
it created.
Contents
Overview
Summary of the Trustee Act 2000
Which trusts are affected
The duty of care
The general power of investment
The standard investment criteria
Advice
Other measures
The position in Scotland
Business opportunities
Important information
For professional advisers only and not
to be relied upon by individuals
technical factsheet
Summary of Trustee Act 2000
The duty of care
The Trustee Act 2000 came into force on 1 February
2001 and applies to England and Wales only (see also
The Position in Scotland). Its main purpose was to
modernise a range of statutory default powers, which
are primarily defined in earlier legislation and largely
affect the way in which trustees can manage and
invest a trust fund.
The Act not only gave trustees much wider powers but
also builds in a safeguard against their possible misuse
in the form of a statutory duty of care to protect the
interests of the beneficiaries.
The most important change was the replacement
of the limited investment power under the Trustee
Investment Act 1961 with a wider general power.
Other measures introduced were designed to support
the investment opportunities now created under
this new power by facilitating more effective trust
administration whilst at the same time ensuring that
trustees act prudently in protecting beneficiaries.
The key reforms announced in the Trustee Act were:
• a new statutory duty of care
• a new general power of investment
• a new power to acquire land for any purpose
• a new power to collectively delegate functions and
appoint agents, nominees and custodians
• a new power to insure trust property without
restrictions and to pay premiums from the trust fund
• new rules for the remuneration/reimbursement of
trustees, agents, nominees and custodians.
Which trusts are affected?
Most modern trusts already grant trustees very
generous administrative and investment powers. The
Trustee Act 2000 therefore has an impact on trusts
where no such wide powers are expressed and the
trustees have to rely on statutory powers as a fall back
when looking after trust assets. These will include a
substantial number of older trusts, charitable trusts,
trusts arising on intestacy and “home made” wills.
The Act does not extend to occupational pension
scheme trusts, authorised unit trusts and Common
Investment Funds (Charities Act 1993) that are already
controlled by their own statutory rules.
The duty states that whenever a trustee carries
out any of the powers contained in the Act or the
equivalent functions under the trust deed, he must
exercise such care and skill as is reasonable in the
circumstances, having particular regard to:
• any special knowledge or experience that he has
and
• where he is acting as a professional trustee, any
special knowledge or experience that it is
reasonable to expect of a person in his position.
This means that a trustee who has special knowledge
is expected to use it in his capacity as trustee. In other
words, a higher duty of care will be demanded from a
professional trustee (such as a solicitor, accountant or
investment banker) than from one who is, say, a layman
member of the settlor’s family.
The nature, size and purpose of the trust will
also be important factors when considering what is
“reasonable in the circumstances”.
The duty of care can be excluded or modified by the
trust instrument.
technical factsheet
The general power of investment
The Trustee Investment Act 1961 imposed restrictions
on trustees acting under trusts that did not confer
wide investment powers. The Trustee Act 2000
replaced these inadequate powers with a new general
power of investment.
Under the general power of investment, unless the
trust deed was created after 2 August 1961 and
contained specific limitations, trustees can make
any investment (excluding land) as if they were the
absolute owners of the trust fund. This contrasts
with the position where trustees had to rely on the
investment powers under the Trustee Investment Act,
which were not regarded as authorising investment in
bonds or certain investment trust products.
However, in exercising any power of investment,
trustees not only have to adhere to the new duty of
care but are also subject to two more new statutory
duties:
• a duty to consider the Standard Investment Criteria
• a duty to obtain proper advice where necessary.
These duties apply to all investment decisions made by
the trustees. ­
The standard investment criteria
Under this duty, the trustees must
• ensure that any investment proposed or retained is
suitable for the trust in question and give due regard
to the need for diversification, where appropriate.
The suitability of different types of investments as a
trustee investment will be influenced by many factors
such as:
• the nature and terms of the trust
• the investment requirements of the trustees and
beneficiaries (i.e. income and/or capital growth)
• the underlying taxation of the investment
• the impact on administration costs
• the tax position and risk profile of the trustees and
beneficiaries
• the sum available for investment
• the investment skills and knowledge of trustees
• any relevant ethical or other investment
consideration.
As far as diversification is concerned, the size of the
trust fund will be a major consideration, with the equity
content of many trusts best served by collective
investments like bonds, unit trusts and investment
trusts.
Trustees are also obliged to review the investments
under their control from time to time and consider
whether, in light of the standard investment criteria,
they should be varied in any way.
Advice
The underlying need for suitability and diversification
means that whenever trustees wish to exercise an
investment power or carry out an investment review,
they must first obtain and consider proper advice.
However, the legislation does provide that trustees do
not need to take advice if they can justly conclude that
it is unnecessary or uneconomical to do so. In practice,
this is likely to occur when the size of the investment
is small or where the trustees possess investment
skills and knowledge making separate guidance
non-essential. Otherwise, trustees will have to seek
specialist advice from somebody who the trustees
reasonably believe to be qualified to give that advice
by his ability in, and practical experience of, financial
and other matters.
A competent financial adviser can readily perform
this role.
technical factsheet
Other measures
Business opportunities
As already mentioned, the Trustee Act contains
a range of new powers to facilitate more effective trust
administration in the absence of express powers in
the trust instrument. These refer to the appointment
of agents, nominees and custodians, the insurance
of trust property and the payment of professional
trustees.
The Trustee Act 2000 imposed new responsibilities
on many trustees. If a trust holds investments then
the trustees need to ensure that they are suitable,
sufficiently diversified and regularly reviewed. Trustees
will often need to seek advice from experts such as
financial advisers.
Of most interest to financial advisers is the power for
trustees to collectively delegate certain discretionary
functions that do not relate to the distribution of
trust assets. These include the ability to delegate the
management of trust investments to, say, discretionary
fund managers. In this instance, the agent would be
obliged to have regard to the standard investment
criteria and obtain advice if appropriate but will not
be subject to the statutory duty of care, which would
effectively be substituted by a separate duty of care
under the general law of agency. The trustees then
have a duty to supervise the agent by keeping under
review:
• the continuing suitability of the person appointed
and
• considering whether the agency agreement (“the
policy statement”) is being complied with
– any review of the agreement is necessary
– there is a need to intervene (such as to direct the
agent or revoke the agreement).
Advisers can assess the particular needs of a trust
and will often be able to recommend collective
investments such as investment bonds, OEICs and
investment trusts, which can offer trustees many
benefits, including:
• a professionally managed and well-diversified
portfolio of investments
• access to overseas markets and specialist sectors
• tax efficiency
• lower administration costs
• low minimum investments
• easy investment valuation.
In addition these investments each have relevant
attractions in their own right, such as:
• the ability to switch investment sectors within an
investment bond without triggering a tax charge
• being able to make a tax efficient assignment of an
investment bond (or a number of cluster policies) to
a trust beneficiary, under an appointment to benefit
The other new powers under the Act are outside the
scope of this factsheet.
• the ability an investment bond provides to defer tax
The position in Scotland
• the ability to offset a trust’s CGT allowance against
The Charities and Trustee Investment (Scotland) Act
2005 removed the default investment powers under
the Trustee Investments Act 1961, for trustees in
Scotland. This Act also introduced some other new
trustee powers but these are not as comprehensive
as those under the Trustee Act 2000. See Trustee
Investment Powers in Scotland for further details.
liability on income from the underlying investments
any capital gains arising on the encashment of
shares in an OEIC or investment trust
• the potential to receive a regular income on a
number of OEICs and investment trusts – this would
be a requirement for many interest in possession
trusts.
Advising trustees on their investments could therefore
be a great ongoing source of business for advisers.
technical factsheet
Important information
This factsheet is based upon Friends Life
understanding of current tax and other legislation at
the release date and may be subject to change in the
future. Whilst every care has been taken to ensure the
accuracy of this information, Friends Life can accept
no responsibility for any actions taken as a result of
this release.
Release Date 09/07/09
Friends Life Limited
Registered Office: Pixham End, Dorking, Surrey RH4 1QA
Incorporated company limited by shares and registered in England and Wales number 4096141
www.friendslife.com
Telephone 0845 602 9189
Friends Life is a registered trade mark of the Friends Life group
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