Chamber and committees

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

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.

Amendments 18 and 21 are my response to the committee’s request for the Government to review the stage 1 evidence on the trustees’ duty to provide information, with a particular focus on potential beneficiaries. Stakeholders questioned whether the duties that will be imposed on trustees should cover potential beneficiaries who might never stand to benefit from trust property, and would therefore be too onerous.

When it comes to information rights, there is a balance to be struck between the rights of those who might benefit from the trust property as a whole and the rights of individual potential beneficiaries. I recognise that requiring trustees to inform potential beneficiaries about their position under a trust could lead to costs being incurred on the trust property, but against that, those who benefit or might benefit from the trust property have a fundamental role in holding the trustees accountable. They cannot do that if they are not properly informed.

Officials have explored the matter further with stakeholders and with the Scottish Law Commission. Amendments 18 and 21 deal with the problem of vexatious requests for information about trusts made by people who are technically potential beneficiaries but who have no real chance of becoming a beneficiary under the trust.

The shift in the balance of trustees’ information duties will ultimately help beneficiaries and potential beneficiaries who are likely to benefit from the trust property. First, it will not affect their right to trust information and, secondly, it will reduce the likelihood of costs that relate to vexatious requests for information being incurred against a trust property.

I move amendment 18.

Amendment 18 agreed to.

Amendments 19 to 21 moved—[Siobhian Brown]—and agreed to.

Section 26, as amended, agreed to.

Sections 27 to 29 agreed to.

Section 30—Provision purporting to limit liability for, or indemnify for, breach of fiduciary duty

Amendment 54 moved—[Jeremy Balfour].

As I have said, if Mr Balfour’s amendments were to be agreed to, trusts would incur more cost in removing a trustee, and the amendments might also make that process more difficult. I am comfortable with the definition in the 2000 act.

Amendment 4 agreed to.

Section 6 agreed to.

After section 6

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

There is a bit of confusion, in that that is to do with charity law and, at the moment, only 12 per cent of charities are trusts. There are serious concerns from OSCR, which is why we will not support amendment 47.

Section 61 is about the alteration of trust purposes, and attempts to balance the truster’s wishes against the wishes of beneficiaries by allowing for a period of 25 years or the lifetime of the truster, whichever is longer, before an application can be made to court. A 25-year time limit was chosen by the SLC because the section is predominantly intended to deal with long-term trusts and the problems that can arise in relation to them; 25 years is an easily workable default rule, which it considers represents a short generation. The committee heard from stakeholders that the provision is welcome, but recommended that applications to court should be made in exceptional circumstances.

I have re-considered the provision after further consultation between my officials and the Law Society, STEP and the SLC. I believe that allowing the court to decide applications on the evidence is sufficient protection to do away with the default time limit altogether.

If amendments 25, 28, 29 and 30 are agreed to, section 61 would no longer stipulate a default time period during which the purposes of a trust cannot be altered. In effect, it would reverse the position set out when the bill was introduced, setting out a maximum time period of 25 years or the lifetime of the truster, whichever is longer, during which the truster may by trust deed exclude the jurisdiction of the court under section 61.

The amendments ensure flexibility for trusters who may wish to exclude the jurisdiction of the courts for a short time and protect against the risk that those unhappy with the terms of a trust may mount an early application before any material change of circumstances has occurred.

Adding a caveat that would allow relevant persons to raise an application in exceptional circumstances would not be in line with the general policy underpinning the section, which is about the problems caused by long-term trusts, and it would be relatively difficult to legislate for what is meant by “exceptional circumstances”. Any caveat might be abused by persons disappointed by the distribution of the trust property, who could raise, or threaten to raise, court proceedings. Ultimately, the legal expenses of defending such an action would come from trust property and would be at the expense of existing beneficiaries.

I move amendment 25.