The fiduciary relationship and its obligations - Trustees no...

Learning Outcomes

This article outlines the core fiduciary obligations that restrict trustees from purchasing trust property. It explains the 'no-conflict' and 'no-profit' rules foundational to the trustee-beneficiary relationship and how equity takes a strict, preventative approach to transactions that create real or potential conflicts. For SQE1, understand the prohibition against self-dealing, the practical reach of the rule to indirect purchases (for example, via nominees, controlled companies or relatives), and the limited circumstances in which court approval or beneficiary authorisation can validate a sale. Understand the fair-dealing rule and the heavy burden it places on trustees to prove full disclosure, fair price and absence of undue influence. Appreciate the consequences of breach, including rescission, account of profits and proprietary remedies where trust funds are used, and how third-party rights (such as a bona fide purchaser for value without notice) affect available remedies. Know the differences between transactions with the trust (self-dealing) and transactions with a beneficiary (fair-dealing), how options or contracts predating trusteeship can change the analysis, and how laches and beneficiary capacity affect rescission.

SQE1 Syllabus

For SQE1, you are required to understand the fiduciary restrictions on trustees purchasing trust property and transactions with beneficiaries, with a focus on the following syllabus points:

• The fiduciary nature of trusteeship: loyalty, good faith, and the avoidance of conflicts and unauthorised profit.
• The no-conflict and no-profit rules and their strict prophylactic application to trustees.
• The self-dealing rule: scope, indirect purchases (via nominees, companies or connected persons), and why fairness is irrelevant.
• The fair-dealing rule: purchases of a beneficiary’s equitable interest; disclosure, fairness and the trustee’s burden of proof.
• Authorisation routes: express trust instrument clauses, court approval in exceptional cases, and fully informed unanimous consent of all sui juris beneficiaries.
• Consequences of breach: voidability, rescission, account of profits, tracing, and proprietary remedies where trust funds were used.
• Effect of resale: remedies where property has passed to a bona fide purchaser for value without notice versus a recipient with notice.
• Role of independent valuation and advice: evidential importance for both fair-dealing and authorised transactions.
• Attempts to circumvent the rule: retirement prior to purchase, purchases through nominees or connected vehicles, and how equity responds.
• Interplay with other trustee duties: duty to act impartially and duty to observe terms of the trust; capacity and consent issues for beneficiaries.
• Limited exception where purchase is pursuant to an option or contract predating the trusteeship.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which rule primarily prevents a trustee from buying trust property directly from the trust?
   1. The fair-dealing rule
   2. The rule against perpetuities
   3. The self-dealing rule
   4. The trustee's duty to invest
2. Under what circumstances might a trustee lawfully purchase the beneficial interest of a beneficiary?
   1. If the trustee pays a price slightly below market value.
   2. If the trustee makes full disclosure and pays a fair price, without abusing their position.
   3. If the trustee obtains consent from only one of the adult beneficiaries.
   4. If the trust instrument is silent on the matter.
3. A trustee uses trust funds mixed with their own money to buy shares, which then increase in value. What remedy might the beneficiaries seek regarding the shares?
   1. Only compensation for the original amount of trust money used.
   2. An order setting aside the purchase entirely.
   3. A proportionate share of the shares, including the increase in value.
   4. An injunction preventing the trustee from selling the shares.

Introduction

The relationship between a trustee and the beneficiaries of a trust is fiduciary in nature. This imposes stringent duties on the trustee, designed to ensure they act solely in the beneficiaries' best interests. One of the most fundamental applications of these duties is the prohibition against trustees purchasing property belonging to the trust they administer. This rule stems from the core equitable principles preventing fiduciaries from allowing their personal interests to conflict with their duties and from profiting from their position. In equity, the approach is preventative: transactions that create a real or potential conflict are curtailed without inquiring into the trustee’s honesty or whether the price was fair. Understanding this prohibition, its rationale, and its exceptions is essential for advising on trust administration and potential breaches.

The Fiduciary Duty of Loyalty

Central to trusteeship lies the duty of loyalty. Trustees must administer the trust solely in the interest of the beneficiaries (Bristol and West Building Society v Mothew [1998] Ch 1). This overarching duty gives rise to two specific fundamental obligations often referred to as the 'no-conflict' rule and the 'no-profit' rule.

The No-Conflict Rule

A trustee must not put themselves in a position where their personal interests conflict, or may possibly conflict, with their duties to the beneficiaries. The law takes a strict approach; it is not necessary to show that a conflict actually resulted in harm to the beneficiaries, only that a conflict existed or could reasonably have been foreseen. The rationale is preventative: to avoid the temptation for trustees to prefer their own interests.

The No-Profit Rule

A trustee must not use their position to make a personal profit, unless expressly authorised (e.g., by the trust instrument, the beneficiaries, or the court). This rule prevents trustees from exploiting opportunities or information gained through their role for personal advantage. It applies even if the trust also benefits, and the trustee acted in good faith (see the approach in Keech v Sandford (1726) and Boardman v Phipps [1967] 2 AC 46 to unauthorised profits more generally).

Key Term: Fiduciary Duty
An obligation to act solely in the best interests of another party (the principal or beneficiary), characterised by loyalty, good faith, and the avoidance of conflicts of interest or unauthorised profit.

Key Term: No-Conflict Rule
The principle that a fiduciary must not place themselves in a position where their personal interests conflict or potentially conflict with their duty to the beneficiaries.

Key Term: No-Profit Rule
The principle that a fiduciary must not obtain any unauthorised benefit or profit by reason of their fiduciary position.

These core fiduciary duties directly underpin the rules restricting trustees from purchasing trust property.

The Self-Dealing Rule: Prohibition on Purchasing Trust Property

The 'self-dealing' rule is a strict application of the no-conflict principle. It prohibits a trustee from purchasing trust property from themselves (or their co-trustees) in their capacity as trustee. The rationale is clear: a trustee acting as both seller (on behalf of the trust) and buyer (in their personal capacity) inevitably faces a conflict between their duty to secure the best price for the trust and their personal interest in buying at the lowest price.

Key Term: Self-Dealing Rule
The rule that a trustee is strictly prohibited from purchasing trust property from the trust, due to the fundamental conflict of interest.

The rule applies regardless of whether the trustee acted honestly, paid a fair market price, or even if the sale benefited the trust. The transaction is voidable at the instance of any beneficiary. Classic authority stresses that fairness does not cure the conflict (Ex p James (1803) 8 Ves 337). A beneficiary may elect to set aside the sale and have the property returned to the trust, with the trustee receiving back their purchase money.

The self-dealing rule is broad in reach. It covers:

• Direct purchases from the trust by the trustee.
• Indirect purchases, such as acquisitions through nominees, connected companies in which the trustee has control, or connected persons (e.g., spouse or close relative), where the substance is that the trustee is effectively on both sides of the transaction.
• Attempts to circumvent via resignation immediately before purchase; equity looks to substance over form and will not permit circumvention.

Worked Example 1.1

Ahmed and Ben are trustees of a family trust holding a small commercial property. The trust needs to raise funds. Ahmed suggests the trust sell the property to his wife, Chloe, for £150,000, which is confirmed by an independent valuation as the current market value. Ben agrees, and the sale proceeds. A beneficiary later discovers the sale.

Is the transaction valid?

Answer:
The transaction is voidable at the instance of the beneficiaries. Although the price was fair market value, this is a clear case of self-dealing. Ahmed, as trustee, has effectively sold trust property to himself (indirectly through his wife). The beneficiaries can apply to have the sale set aside. Ahmed's honesty or the fairness of the price is irrelevant.

The self-dealing rule applies equally if the purchase is made indirectly, for example, through an agent, a company controlled by the trustee, or a close relative like a spouse. Independent valuation is prudent, but under self-dealing it does not eliminate the conflict or validate the sale; it affects only the practical fairness of the price and may be part of a court’s assessment where approval is sought in advance.

Limited Exceptional Approval

Courts have, on rare facts, sanctioned a trustee’s purchase where the conflict is attenuated and the equities compelling (Holder v Holder [1968] Ch 353). In that case, an executor who had effectively taken no part in the sale process and purchased at public auction was permitted to retain the property. This is not a general relaxation; it reflects exceptional circumstances and should not be seen as routine approval of self-dealing.

Pre-existing Options or Contracts

Where a trustee’s purchase is pursuant to an option or contract formed prior to the trusteeship, the transaction may be allowed because the trustee is not creating a new conflict by virtue of their fiduciary role; they are simply performing pre-existing rights. Proper disclosure remains essential.

Worked Example 1.2

Priya is appointed as trustee of a trust that holds farmland. Before appointment, she held a legally enforceable option to purchase the same land from the prior owner (who later settled the land on trust). After appointment, she seeks to exercise the option.

Is Priya barred by the self-dealing rule?

Answer:
The purchase may be permitted, because Priya’s option predates her trusteeship. The essential conflict in self-dealing is lessened where the trustee executes pre-existing rights rather than negotiating or deciding the sale in her fiduciary capacity. Full disclosure to co-trustees and beneficiaries and independent steps (e.g., auction or external oversight) are prudent, and court approval can be sought to avoid later challenge.

The Fair-Dealing Rule: Purchasing a Beneficiary's Interest

A separate, but related, rule applies where a trustee purchases the beneficial interest of a beneficiary, rather than the trust property itself. This is known as the 'fair-dealing' rule. Unlike the self-dealing rule, such a transaction is not automatically voidable.

Key Term: Fair-Dealing Rule
The rule permitting a trustee to purchase the beneficial interest from a beneficiary, provided the trustee acts fairly, makes full disclosure, and does not abuse their position.

A purchase under the fair-dealing rule will be upheld only if the trustee can demonstrate that:

• They did not take advantage of their position as trustee.
• They made full and frank disclosure of all material facts relevant to the transaction to the beneficiary.
• The transaction was fair and honest, including paying a fair price for the beneficial interest (ordinarily evidenced by independent valuation and the beneficiary having independent advice).

The burden of proof rests heavily on the trustee to satisfy these conditions. If the trustee cannot discharge this burden, a beneficiary can have the transaction set aside.

Worked Example 1.3

Fatima is the trustee of a trust fund held for Leo (aged 25) absolutely. The fund consists mainly of shares in a private company, difficult to value accurately. Fatima offers to buy Leo's beneficial interest for £50,000. She provides Leo with the trust accounts but does not mention that she recently received an informal approach from a competitor suggesting a potential takeover of the company, which could significantly increase the share value. Leo, needing funds, agrees to the sale.

Is the sale likely to be set aside?

Answer:
Yes, the sale is likely voidable. Fatima has failed to make full disclosure of a material fact (the takeover approach) that could affect the value of Leo's interest. This constitutes a breach of the fair-dealing rule, as she took advantage of information gained as trustee without disclosing it to the beneficiary. Leo can apply to have the sale set aside.

When the beneficiary is vulnerable, has limited financial sophistication, or lacks capacity, the court expects greater safeguards, such as independent legal advice and valuation. Age and capacity matter: without full capacity, beneficiary consent cannot validate the transaction, and court involvement would be appropriate.

Worked Example 1.4

Omar is trustee. He proposes to buy the life interest from Bea, a beneficiary, for a lump sum. Bea is 19 and financially inexperienced; Omar arranges a valuation but discourages Bea from seeking her own advice, suggesting it would be “a waste of fees”.

Is Omar’s purchase likely to stand?

Answer:
No. Even beyond issues of capacity (a 19-year-old may be adult but inexperienced), Omar has failed to ensure full, independent advice for Bea. Under fair-dealing, the trustee bears the burden to show fairness and full disclosure and that no advantage was taken. Discouraging independent advice undermines that. The sale would be voidable at Bea’s option.

Authorisation for Trustee Purchases

Despite the strict rules, there are circumstances where a trustee purchase may be permitted:

• Provision in the Trust Instrument: The settlor may expressly authorise trustees (or a specific trustee) to purchase trust property, often subject to conditions (e.g., obtaining an independent valuation, advertising sale, or sale by public auction). Such clauses must be complied with strictly.

• Court Approval: The court has jurisdiction to approve a sale to a trustee if satisfied it is in the beneficiaries' best interests (Holder v Holder [1968] Ch 353 is an exceptional example). Approval is best sought in advance of the transaction; the court will scrutinise process (public auction, the trustee’s role in sale decisions, transparency).

• Consent of Beneficiaries: If all beneficiaries are sui juris (adult and mentally capable) and, after full disclosure of all relevant facts and independent advice, unanimously consent to the purchase, the transaction will be valid. Consent must be fully informed; merely tacit or partial consent is insufficient.

• Pre-existing Rights: As noted, where a trustee exercises an option or contractual right predating their trusteeship, the transaction may proceed, subject to full disclosure and fairness safeguards.

Exam Warning

Be cautious with scenarios suggesting beneficiary consent. Ensure all beneficiaries are adults, have capacity, have received full disclosure of all material facts, and all agree. Partial consent is insufficient to validate a transaction under the self-dealing or fair-dealing rules against non-consenting beneficiaries. Independent advice and valuation are powerful evidence of informed consent.

Consequences of Breach

If a trustee breaches the self-dealing or fair-dealing rules, the primary remedy is rescission at the instance of any beneficiary: the transaction is set aside, the property is returned to the trust, and the trustee receives back the purchase price (subject to equitable adjustments, such as accounting for profits derived or deterioration caused).

If the trustee has resold the property to a bona fide purchaser for value without notice, rescission against the third party is not possible. In this situation, the beneficiaries can require the trustee to account for the profit made on the resale and may pursue personal and, where possible, proprietary remedies against recipients with notice.

Key Term: Account of Profits
An equitable remedy requiring a fiduciary who has profited from a breach of duty to pay over those profits to the principal or beneficiary.

Key Term: Rescission
An equitable remedy that sets aside a transaction, aiming to restore the parties to their pre-transaction positions.

Key Term: Bona Fide Purchaser for Value Without Notice
A person who acquires legal title for value, without notice of any prior equitable interest. Equity will not compel such a purchaser to return the property; the equitable claimant’s remedies lie against wrongdoers or recipients with notice.

If the property has decreased in value since the wrongful purchase, beneficiaries can rescind and take the property back (putting the trustee back in funds), or affirm the sale and sue the trustee personally for the loss to the trust fund caused by the breach. Delay in seeking rescission may affect equitable relief (laches), especially where third-party rights have intervened, but where minors are involved or where concealment occurs, time runs more generously.

Where trust funds are used to acquire property (clean substitution or mixed funding), proprietary remedies are often available:

• In clean substitution (trust money used to buy a new asset), beneficiaries can elect to claim the asset outright if it has gone up, or to take an equitable lien for the amount misapplied if it has gone down.
• In mixed assets (trust money mixed with trustee’s money to buy an asset), beneficiaries can claim a proportionate share of the asset reflecting the trust’s contribution, including the proportionate increase in value.

Worked Example 1.5

A trustee mixes £40,000 of trust money with £60,000 of personal funds to buy a portfolio of shares now worth £150,000.

What can beneficiaries claim?

Answer:
A proportionate proprietary share aligned to the trust’s contribution—here 40%—in the portfolio, including the increase in value. They may elect between proprietary recovery and personal compensation depending on advantage, but the mixed-asset election permits sharing in the uplift in proportion to the trust’s input.

Revision Tip

Remember the strictness of the self-dealing rule. Unlike the fair-dealing rule, the trustee's honesty or the fairness of the price is irrelevant. If a trustee buys trust property from the trust (directly or indirectly), the transaction is voidable by the beneficiaries without needing to prove unfairness.

Further Practical Points and Safeguards

• Independent Valuation and Advice: In fair-dealing and authorised purchases, contemporaneous independent valuation and the beneficiary’s independent legal advice are powerful evidence of fairness and informed consent. They are not a panacea for self-dealing, but important where authorisation is possible.

• Impartiality: Trustees must act impartially between beneficiaries. A sale to a trustee that advantages one beneficiary’s interests over another’s (e.g., life tenant over remainderman) invites scrutiny and potential breach of trust in addition to the self-dealing conflict.

• Process Controls: Public auction, competitive bidding, publication of sale particulars, and trustee recusal from sale decision-making help to reduce conflicts and support court approval if required.

• Retirement to Circumvent: Retirement immediately prior to purchase does not necessarily defeat the rule. Equity looks at substance: if the trustee had material involvement in sale decisions or retired to facilitate the purchase, the rule can still bite; courts may refuse approval and beneficiaries can seek relief.

• Connected Persons and Vehicles: Purchases by spouses, civil partners, close relatives, companies controlled by the trustee, or nominees are treated as self-dealing if, in substance, the trustee is on both sides. Disclosure of connections is essential regardless of authorisation routes.

• Options Predating Trusteeship: Exercise of pre-existing options or contracts is an exception commonly discussed. Full disclosure remains necessary, and court approval offers certainty where risks of challenge exist.

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees owe fiduciary duties of loyalty, requiring them to avoid conflicts of interest (no-conflict rule) and unauthorised personal profit (no-profit rule).
• The self-dealing rule strictly prohibits trustees from purchasing trust property due to the fundamental conflict of interest. Such transactions are voidable by beneficiaries irrespective of fairness or price.
• Indirect purchases (through nominees, controlled companies or connected persons) and attempts to circumvent via retirement fall within self-dealing’s scope.
• Limited exceptional approval is possible (e.g., Holder v Holder), but only on compelling facts and often with court oversight; fairness alone does not cure conflict.
• The fair-dealing rule permits trustees to purchase a beneficiary's equitable interest only if the trustee proves full disclosure, fair price, independent advice and no abuse of position. The burden is on the trustee, and transactions are otherwise voidable.
• Authorisation may come from the trust instrument (with strict compliance), the court (in exceptional circumstances), unanimous informed consent of all sui juris beneficiaries, or via the execution of pre-existing options or contracts predating trusteeship.
• Breach can lead to rescission of the sale, account of profits from the trustee, and proprietary remedies (including proportionate shares and liens) where trust funds were used.
• Sales to bona fide purchasers for value without notice cannot be unwound; beneficiaries pursue personal claims or proprietary relief against recipients with notice.
• Safeguards—independent valuation, independent advice, public auction—are essential evidential supports for fairness and informed consent in permitted transactions.
• Impartiality and process integrity remain central; self-dealing questions often overlap with trustees’ duty to act even-handedly and to observe the terms of the trust.

Key Terms and Concepts

• Fiduciary Duty
• No-Conflict Rule
• No-Profit Rule
• Self-Dealing Rule
• Fair-Dealing Rule
• Account of Profits
• Rescission
• Bona Fide Purchaser for Value Without Notice