Chamber and committees

We feel that amendment 47 would change the law between trusts and charities.

Protectors have proved to be successful in other trust jurisdictions and the SLC concluded that they are almost certainly competent under Scots law, albeit that their appointment is not common. Section 49 of the bill clarifies that protectors can be appointed under Scots law and provides a list of example powers that might be conferred on protectors by a trust deed.

The list was designed to be wide since the office of protector is relatively novel in Scots law, but I have listened to the concerns that were raised by stakeholders about some of the powers, and I recognise the committee’s concern. That is why amendment 24 will remove those powers from the illustrative list in section 49. That does not, however, limit the generality of the powers that can be conferred on the protector.

I move amendment 24.

Amendment 24 agreed to.

Section 49, as amended, agreed to.

Sections 50 to 54 agreed to.

Section 55—Agreement or approval for purposes of section 54(2)

Amendment 59 moved—[Jeremy Balfour]—and agreed to.

Section 55, as amended, agreed to.

Section 56—Giving of approval by court

In relation to amendment 54, I understand the Law Society’s intention, but the amendment is drafted in far too wide a way and it defeats the bill’s intention altogether. I ask that committee members reject it.

Amendment 8 agreed to.

Amendments 9 and 10 moved—[Siobhian Brown]—and agreed to.

Section 12, as amended, agreed to.

Sections 13 to 17 agreed to.

After section 17

I believe that I speak for all of us when I say that it is unacceptable that a convicted murderer can continue to act as executor on their victim’s estate.

The present position in Scots law appears to be uncertain, with some experts suggesting that the law has one effect while others disagree. The leading practitioners’ textbook on the administration of estates suggests that the appointment of a murderer is valid but should ordinarily be declined, but one well-known case shows that a convicted killer cannot be relied on to decline office.

I take this opportunity to thank the campaigners for all their work on the issue.

Amendments 5, 38 and 39, in my name, will clarify the law. An executor who is convicted of, or is being prosecuted for, the murder or culpable homicide of the deceased will be regarded as unfit for that office and can therefore be removed by the court. An application to remove can be made at the appropriate sheriff court, and the provision will be retrospective. For example, an executor who was convicted of murder before the provision came into force could be removed from office.

In addition, where a sheriff is considering an application for the appointment of an executor dative and is satisfied that the person seeking appointment has been convicted of, or is being prosecuted for, the murder or culpable homicide of the deceased, they must refuse the application. That practical solution will both provide a resolution and help to ease the distress of other persons who might find themselves in such a situation. Importantly, it will also provide the necessary legal certainty that means that the administration of the deceased’s estate cannot be called into question because of concerns about the validity of the executor’s appointment.

I move amendment 5.

In its stage 1 report, the committee recognised that the power may already exist for trustees to choose to invest in a way that allows them to consider objectives beyond maximising financial returns, subject to the terms of the trust deed. Nevertheless, it recommended that the bill should be amended to put that matter beyond doubt, and amendment 11 does that. I am grateful to the committee for its work on this matter.

Amendment 11 is intended to be a restatement of the current legal position, taking account of case law but making the position clearer for users of the legislation for trust deeds in future. It will make clear that, unless the trust deed provides otherwise, non-financial considerations in the form of ethical, social and environmental considerations, which are sometimes known as ESG—environmental, social and governance—factors, can be taken into account by trustees when choosing between alternative investments that may perform equally well and are subject to overall trust purposes.

It might be helpful to the committee if I give an example to illustrate how the provision might work in practice. If a trust is established with purposes that make no reference to, and have no connection with, environmental goals, this section will allow trustees to properly take environmental considerations into account when choosing investments for the trust.

If the trustees obtain advice from an appropriate financial adviser that the environmentally friendly investment has the best financial prospects, or has financial prospects that are equally as good as those for any other investment, trustees may properly decide that the environmentally friendly investment is a suitable investment. This section will give trustees the confidence to take into account non-financial considerations when making decisions about investing trust property in line with the trust purposes.

Amendment 11, in my name, already sets out that trustees can take into account non-financial considerations when considering investment decisions. My amendment will be of some assistance to trustees of a charitable trust in the situation described by Jeremy Balfour. However, I have serious concerns about the effect of the member’s amendment 47. First, it singles out heritable property and thereby calls into doubt whether such trustees must achieve best value for moveable property. Secondly, no substantial work or consultation with either the Office of the Scottish Charity Regulator or the charity sector has been undertaken on whether such a power is needed or even wanted.

By singling out charities that take the form of trusts, a two-track system for Scottish charities would be created, as those charities that take the form of a trust account for only 12 per cent of Scottish charities. At a minimum, that would cause unnecessary complexity in the law. In addition, it could have unintended and unforeseen consequences to existing charities, of all legal forms, as well as those that may be set up in the future.

OSCR has expressed to the Scottish Government that amendment 47 raises a number of issues that require further detailed consideration, including its impact on charity trustees’ duties, the fact that a truster’s intentions could be disregarded, and the different treatment of charities depending on their legal form. OSCR has suggested that this matter could form part of the wider review of charity regulation that the Scottish Government will undertake.

Ultimately, amendment 47 is about charity law, not trust law, and it would be inappropriate to make such a sweeping change to charity law in this bill. When the member put this question to John McArthur at stage 1, he said:

“I think that we are in danger of mixing up charity law and trust law ... I would be slightly concerned that if we go down the route that you are suggesting, there would be a conflict between charity law and trust law.”—[Official Report, Delegated Powers and Law Reform Committee, 16 May 2023; c 12.]

I am of a similar view. If amendment 47 were passed, I consider that it would have significant unintended effects on the charity sector. Therefore, I ask the committee to reject amendment 47, which was not recommended at stage 1, and I ask members to support amendment 11.

I move amendment 11.

During the stage 1 debate, the issue of certain types of trust being used for tax avoidance purposes was raised. In the past, trusts had a reputation of being a vehicle used primarily to avoid tax. That has changed in the past couple of decades, following the introduction of the trust registration service. Nevertheless, I have thought about the comments made in the debate and have considered what more could be done to the bill to prevent trusts being used to avoid the payment of tax that would otherwise be due.

Section 64 of the bill includes a statutory court power, exercisable by the Court of Session, to grant a remedy, if that is considered appropriate, when a trustee makes a decision that would not have been made but for the trustee being in error as to fact or law. In such circumstances, the granting of a remedy by the court could have the effect of wholly or partially reducing the trustee’s decision. One particular concern, which was not raised by any stakeholder during stage 1 but was discussed by the SLC, is the potential use of that provision to avoid the consequences of a failed tax avoidance scheme entered into by trustees. That has the potential to make Scottish trusts a more attractive vehicle by which to avoid tax than trusts governed by other UK jurisdictions.

Amendment 31 provides the court with some guidance on how to exercise its wide discretion in relation to the granting of a remedy. The amendment signals to the court, and to potential applicants, the wider public policy considerations engaged in such applications. If the purpose of applying to the court is simply to avoid the tax consequences of a trustees’ decision, the court has the discretion to refuse any remedy—and would have had the discretion to do so anyway.

Regarding amendment 32, the SLC looked at how a court can provide guidance, directions and advice to assist trustees who encounter problems relating to the administration of the trust and recommended that that power should be suitably re-stated in primary legislation. When the bill was introduced, it was our view that primary legislation was not necessary because the courts already had the power to make provision by court rules. However, stakeholders, including the Senators of the College of Justice, thought that a provision should be retained in primary legislation to avoid doubt about those matters.

It was not our intention to cast doubt on that useful method for trustees to obtain advice about administrative difficulties encountered in a trust. I have listened to the views of stakeholders and of the committee, which is why amendment 32 in my name makes clear provision for the court to assist trustees and others who have questions about the administration of a trust. My officials have shared that amendment with the Lord President and his office has confirmed that he welcomes the provision being set out in primary legislation.

Amendment 42 responds to the committee’s recommendation regarding the role of the court in hearing trust applications. Evidence was taken during stage 1 about the legal cost of applications raised in the sheriff court, relative to the cost of those raised in the Court of Session. Although some suggested that there was no significant difference, others took the opposite view.

The Scottish Government does not have data on such costs. As the Law Society said in its stage?1 briefing to MSPs, such information is difficult to capture accurately with reference to trust cases. I sought information from the Scottish Courts and Tribunal Service, the Law Society of Scotland, the Society of Trust and Estate Practitioners and the Faculty of Advocates to try to get an accurate picture of the legal costs, but that did not prove helpful because, for a variety of reasons, none could provide the information I requested.

I understand that the committee also ran into obstacles when it corresponded with the SCTS and the auditor of the court. The auditor, for instance, said that it is relatively infrequent for trust cases to be received for account and that those that are received

“vary in their individual circumstances and complexity so it would be difficult to find any particularly meaningful insight from any average figure.”

Despite that, I understand the committee’s point about the importance of flexibility being added to the bill so that future provision could be made for a greater choice between the courts when it comes to making different types of trust application.

Amendment 42 would do that. It would confer on the Scottish ministers a power, with the consent of the Lord President of the Court of Session, to vary the definition of “court” in section 74 of the bill, which would allow changes to be made regarding which court can hear different types of trust application. For example, the bill as introduced allows the Court of Session to grant trustees additional powers of administration or management in relation to the trust property. Regulations could be made in the future so that the sheriff court may grant those additional powers.

After consultation with the Lord President, I have made provision for the consent of the Lord President, given their role as head of the judiciary. Given that the power would be available across a range of statutory provisions in this case, I believe that providing for the consent of the Lord President is sensible.

The regulations would be subject to affirmative procedure.

I understand the point made by Jeremy Balfour’s amendment 60 and am happy to support it.

I urge members to support amendments 60, 31, 32 and 42.

As I have previously stated, due to the serious concerns from OSCR, I ask the committee to reject amendment 47.

Amendment 11 agreed to.

Amendment 47 moved—[Jeremy Balfour].

Section 41 is about how long trusts can accumulate income for. The current law in the area is complex, uncertain and inconsistent, and the SLC’s recommendation to repeal the existing rules met with universal support. However, some stakeholders have questioned why charitable trusts are treated differently from other types of trusts, meaning that they cannot accumulate income. Amendment 58, in Jeremy Balfour’s name, would allow them to do so.

I have serious concerns about the effect of amendment 58. Trusters who set up public or charitable trusts almost invariably want the benefits to be provided immediately, so I do not think that the exclusion will create any practical difficulties. More important is that, during stage 1 evidence, I laid out my concerns that accumulations in charitable trusts over a long period of time could fall foul of the charity test that is set out in sections 7 and 8 of the Charities and Trustee Investment (Scotland) Act 2005. I also told the committee of my concern that it might not meet the definition of “charitable purposes” that is applicable for UK tax purposes as provided by the Charities Act 2006.

Since then, the Scottish Government has corresponded with OSCR, which has said that if there were no statutory limit on accumulation by charities, it would have serious concerns about whether a trust that had a directed long-term accumulation was meeting the charity test, and therefore the trust’s charitable status could be brought into question. The committee did not recommend the change in its stage 1 report.

On amendment 57, I understand that some trusters might have anticipated the change that will be brought about by section 41 of the bill and might have drafted their trust deed with that in mind. That is especially the case given the time between the SLC making its recommendations and the introduction of the bill. Amendment 57 would allow trust property to be disposed of in line with a truster’s wishes, where the change was anticipated during this time. However, as drafted, amendment 57 might not quite achieve the intended aim, so I might have to revisit the matter again at stage 3.

On the basis that amendment 58 could have unintended consequences for the Scottish charity sector in respect of the work of OSCR, I urge the committee to reject it. I ask members to agree to amendment 57.

During stage 1, the committee heard evidence about how private purpose trusts are defined in section 42 of the bill and whether that definition is sufficient to distinguish between private purpose trusts with a beneficiary and “regular” trusts.

The definition of the term “private purpose trust” is important for the operation of the bill as a whole and for the SLC’s policy intentions. For example, several provisions in the bill expressly do not apply to private purpose trusts.

The Scottish Government has explored the matter further with the SLC, so amendment 23 will alter the definition of “private purpose trust” in the bill. It clarifies that such a trust exists where the trust property is held by, or is vested in, a trustee for the furtherance of a specific purpose which is not a charitable or other public purpose and, in contrast to a regular trust, is not constituted

“solely for the benefit of a specific beneficiary (or potential beneficiary).

That reinforces the distinction between beneficiary trusts, which have as their sole purpose the benefit of a specific beneficiary or potential beneficiary, and private purpose trusts, whose purposes are not solely to benefit a specific beneficiary or potential beneficiary.

I move amendment 23.

Amendment 23 agreed to.

Section 42, as amended, agreed to.

Sections 43 to 48 agreed to.

Section 49—Protectors

Section 12 is, generally, a default section, which applies to a trust unless the trust deed provides otherwise. The SLC’s policy intention on the issue is quite clear, as are the explanatory notes. However, the effect of section 12(1), as drafted, does not appear as intended to accommodate arrangements under a trust that will provide for trustees to take decisions other than by majority.

I am aware that some stakeholders have questioned the status of existing trusts that require a specific trustee to be involved in making a decision. The clear policy intention is that such trusts should continue to operate as they do currently. Amendment 8 resolves the issue by making it clear that section 12(1) is a default rule, which can be departed from by express provision in the trust deed, or where that is implied or required by a context where there is no trust deed.

In its stage 1 report, the committee asked me to consider defining a number of terms that had been highlighted by stakeholders. I wrote to the committee, setting out that I would consider that further. One such point was the definition of “beneficiary” in the context of public trusts, which was raised by the Law Society of Scotland. It said that the definition that is used in the bill is geared towards private trusts and is not particularly suited to public trusts. Since stage 1, I have examined the matter further and the Scottish Government has spoken to the Law Society.

In the context of trustee decision making in a public trust, the matter could be helpfully clarified. Section 12 provides a default rule that a decision binds the trustees only if it is made by a majority of those who are, for the time being, able to make it. Importantly, a trustee is not to be regarded as able to make a decision where they have, or might have, a personal interest in the decision, but that can be overridden by the trust deed or in specific circumstances. One such circumstance is where all beneficiaries know of the personal interest and consent to the trustee acting.

Although that circumstance may work in the context of a private trust, it would be unlikely to work in the context of a public trust. Amendment 9 sets out that section 12(2)(a) may be disregarded where the trust is a public trust and the decision is intended to benefit a section of the public of which a trustee is a member. In that circumstance, the trustee in question should not be disqualified from participating in the decision-making process by reason of their being a member of the section of the public that the decision is intended to benefit. However, a trustee is not permitted to participate in decisions in which that trustee has a particular interest that is specific to them as an individual. In other words, where the trustee’s personal interest in the decision is greater than, or goes beyond, their general interest in the decision as a member of the section of the public that the decision is intended to benefit, they should not be allowed to participate in the decision-making process.

Amendment 12 concerns section 22. That section relates to section 2 of the Apportionment Act 1870, which provides that all rent, annuities, dividends and other periodical payments in the nature of interest should be considered as accruing from day to day, and may be expressly disapplied by the trust deed.

I am concerned about the potential unintended tax consequences of the power that is conferred on trustees by that section. In order to avoid the risk of the imposition of higher taxes, amendment 12 adjusts the provision on trust law to set out the default provision that trustees have the discretion to decide whether either to time-apportion income in accordance with section 2 of the 1870 act or to treat income as accruing when it arises.

Amendment 22, in my name, sets out that a simple majority of the trustees must sign a document in order for it to be validly executed.

There is a tension between sections 40 and 73 of the bill. Section 40 provides that

“a deed ... is valid if executed by a majority of such of the body of trustees as are both capable and traceable.

On the other hand, section 73 inserts into the Requirements of Writing (Scotland) Act 1995 a provision that takes no account of whether the trustees are incapable or untraceable.

Incapable and untraceable trustees should, for a number of reasons, be included in the total number of trustees for the purposes of calculating the number that is required to form a majority in order to validly execute trust deeds. Whether a trustee is incapable or untraceable will change over time. If the number of trustees required to execute a trust deed is tied to these matters, the number of trustees required to validly execute a trust deed will also change over time. It would not be possible simply to look at the number of trustees in office at the time of execution of the deed, or at the number of signatures on a deed, in order to ascertain whether the document was validly executed. Instead, there would be a requirement to look behind the document to establish whether any of the trustees who were in office at the time that the deed was executed were incapable or untraceable at that time. That is impractical and would create uncertainty for any person who was seeking to rely on deeds that were executed by trustees.

If incapable or untraceable trustees in office make it difficult for the active trustees to command a majority to execute deeds, the bill already provides sufficient mechanisms for their removal from office. That includes sections 6 and 7 of the bill, which allow the court, or in some cases trustees, to remove a co-trustee.

I move on to Jeremy Balfour’s amendment 54. The effect of section 30 is to render ineffective a provision in a trust deed that purports, in a blanket fashion, to limit a trustee’s liability for breach of fiduciary duty, or to indemnify a trustee for such a breach. There is, however, an exception for a provision that authorises a particular transaction, or a particular class of transactions, that would otherwise be in breach of fiduciary duty.

The policy intention behind this section is to protect beneficiaries from overly broad clauses that seek to limit a trustee’s liability or indemnity clauses. It is there to protect trust property and, by extension, beneficiaries, from acts of trustees that breach their fiduciary duties. The SLC is well aware that broad provisions risk abuse, especially as it might be seen to encourage trustees to misuse their office to their personal advantage.

Amendment 54 would have the opposite effect from what the SLC intends. It would widen the range of circumstances that can be covered by provisions to limit liability or indemnify trustees for breaches of duty. That would all be to the potential detriment of beneficiaries, who would find that their usual rights of recourse against trustees who have breached their trustee duties were either weakened or unavailable.

With regard to amendment 55, I understand the point that Jeremy Balfour is making, and I am happy to support it.

Finally, I can see that amendment 56 would be a useful addition to section 39 and I am happy to support it, although I might need to think about how it interacts with other provisions in the bill, with a view to bringing forward stage 3 amendments to make the necessary adjustments.

I urge members to support amendment 8 and the other amendments in my name in this group.

I ask members to support Jeremy Balfour’s amendments 55 and 56. However, if Mr Balfour wishes to press amendment 54, which was not recommended by the committee at stage 1, I ask the committee to reject it.

I move amendment 8.