Core principles of trust law - The fiduciary relationship

Learning Outcomes

This article outlines the fiduciary relationship in trust law, including:

• Defining the fiduciary character of trustees and personal representatives and its policy rationale
• The core duties of loyalty, avoidance of conflicts, and prohibition on unauthorised profit
• Spotting typical breaches in SQE2-style problem scenarios (self‑dealing, hidden commissions, misuse of information, competition)
• Applying the self‑dealing and fair‑dealing rules to trustee purchases and dealings with beneficiaries
• Understanding incidental profits such as directors’ fees arising from trust shareholdings and when they must be accounted for
• Routes to valid authorisation: express instrument power, fully informed beneficiary consent, and statutory or court approval
• The standards of full disclosure and capacity required for consent and when transactions remain voidable
• Advising on relief, removal, and protective steps where breaches occur
• Selecting appropriate remedies: account of profits, constructive trust, rescission, equitable compensation, injunctions
• The scope and limits of protection: s 61 Trustee Act 1925, reimbursement of proper expenses, and exemption clauses

SQE2 Syllabus

For SQE2, you are required to understand the fiduciary relationship in trust law, examining the duty of loyalty, conflicts of interest, and the no profit rule, with a focus on the following syllabus points:

• understanding the legal meaning and significance of the fiduciary relationship in trust law
• explaining the principal fiduciary obligations of trustees, including the duty of loyalty, prohibition of unauthorized profit, and avoidance of conflicts
• identifying and assessing breaches of fiduciary duty
• describing the main remedies available to beneficiaries following trustee breach, including account of profits and setting aside transactions
• recognizing breach, profit, and conflict in client-focused fact patterns

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.

• What is the fundamental purpose of classifying trustees as fiduciaries in English trust law?
• Name two classic examples where a trustee would breach their fiduciary duty to beneficiaries.
• What remedy is usually awarded if a trustee earns personal profit from their role as trustee without authority?
• True or false: A trustee can ever buy trust property personally if all the beneficiaries agree in advance.

Introduction

Trustees are subject to strict obligations towards trust beneficiaries. These are called fiduciary duties and are central to English trust law. Fiduciary duties require trustees to put the beneficiaries' interests ahead of their own, to act with honesty, and never to profit improperly from their role or allow their personal interests to compete with the trust. The rules are applied strictly: good faith, absence of loss, or the “reasonableness” of a deal does not excuse breach of fiduciary duty.

Key Term: fiduciary
A person having legal or ethical duty to act solely for the benefit of another and not for their own gain.

Key Term: account of profits
An equitable remedy requiring a fiduciary to disgorge personal profits obtained in breach and pay them to the trust.

Trustees owe duties beyond those of ordinary good faith. Every trustee is always a fiduciary, and the law imposes a high standard as a matter of public policy to protect beneficiaries and maintain trust in the institution of trusteeship. Personal representatives (executors and administrators) administering estates also stand in a fiduciary position to beneficiaries of the estate and must not profit from their office or place themselves in conflict when dealing with estate assets.

Key Term: personal representative (PR)
An executor or administrator responsible for collecting, managing and distributing a deceased’s estate. PRs are fiduciaries.

The Fiduciary Nature of a Trustee

The defining characteristic of a fiduciary is the duty of loyalty. This compels the trustee to manage the trust in the sole interest of beneficiaries, not for their own advantage or to further personal interests. Two core aspects follow from this loyalty:

• The “no conflict” rule: a trustee must not place themselves in a position where their personal interests may conflict with duty to the beneficiaries.
• The “no profit” rule: a trustee must not make an unauthorised profit from their position or use trust property or information to obtain personal gains.

Key Term: duty of loyalty
The fundamental requirement that a fiduciary must act entirely for the benefit of their beneficiaries.

Key Term: conflict of interest
Any situation where the fiduciary's personal interests could potentially be inconsistent with their duties to the beneficiaries.

Key Term: unauthorized profit
Personal profit gained by a fiduciary in connection with their position and without proper beneficiary consent.

A fiduciary must never put themselves in a situation where their own interests might conflict with their trust duties, nor make any personal profits without full consent from the beneficiaries. The emphasis is on avoiding even the possibility of conflict. If a trustee takes up an opportunity or uses inside information acquired as a trustee to make money, the profit is held on constructive trust for the beneficiaries and must be accounted for.

Key Term: constructive trust
An equitable mechanism by which property or profits held by a person are treated as held for another because it is just to do so (for example, where a fiduciary has gained unauthorised profits).

Core Fiduciary Duties of Trustees

• No Unauthorized Profit: Trustees must not obtain, directly or indirectly, any profit from their position apart from expressly authorized fees. This includes profits from renewing leases, exploiting insider information, commissions, or directors’ fees arising from a shareholding held for the trust.
• Avoidance of Conflicts: Trustees must avoid circumstances where there is even a possibility that their own interests may compete with the interests of the trust. The prohibition is strict and applies irrespective of fairness or market value.
• Duty of Full Disclosure: Trustees are required to account transparently for their conduct and disclose any potential or actual conflicts or gains. Informed consent must be based on full disclosure and be genuinely free.
• No Competition with Trust Business: A trustee must not set up or run a business in competition with the trust’s business, nor divert opportunities that belong to the trust.
• Duty to Act Personally and Impartially: Trustees must act personally, unanimously (unless the instrument provides otherwise), and impartially between beneficiaries, without favouring their own interests.

Consent and authorisation may provide a lawful route in limited situations:

• Express authorisation in the trust instrument may permit specified remuneration or a conflicted act.
• Fully informed consent by all adult beneficiaries with capacity can authorise an otherwise conflicted or profitable transaction. Consents must be free, based on full disclosure, and not obtained under pressure.
• Statutory or court authorisation can permit remuneration or validate otherwise problematic acts.

Key Term: informed consent
Valid consent given freely by all adult beneficiaries with capacity after full disclosure of all material facts, risks and alternatives.

Key Term: self-dealing rule
Where a trustee purchases trust property; the transaction is presumptively voidable at the instance of beneficiaries regardless of fairness.

Key Term: fair-dealing rule
Where a trustee purchases the beneficiary’s beneficial interest; the transaction stands only if the trustee proves full disclosure and fairness.

Worked Example 1.1

A trustee manages a trust that owns works of art. One of the paintings is to be sold at auction. The trustee owns an art gallery and buys the painting through the gallery, paying the auction price but making a commission from the sale. Has the trustee breached any fiduciary duty?

Answer:
Yes, the trustee has breached the duty not to profit and the duty to avoid conflict of interest. By buying trust property through their own business, even at a fair price, the trustee has placed themselves in a position of conflict and profited without full beneficiary consent.

Worked Example 1.2

A trust has several beneficiaries. One trustee is the parent of a beneficiary. Trustees decide to invest trust funds in a start-up company owned by that beneficiary. The interested trustee participates in the decision and votes in favour. Is this a breach?

Answer:
Yes. The trustee is in a conflict situation, as a personal or family interest is involved. Participating in that decision breaches the fiduciary requirement to avoid conflicts—even where there may be no actual loss to the trust.

Breach and Consequences

All breaches of fiduciary obligations have serious legal effects:

• The trustee is strictly liable to account for any improper profit. Liability does not turn on dishonesty or loss.
• Profits made in breach are held on constructive trust for the beneficiaries.
• Transactions tainted by conflict are voidable at the beneficiaries’ election (for example, a trustee’s self‑purchase can be set aside even if fair).
• Equitable compensation may be ordered for any losses caused by breach of duty.
• Beneficiaries may set aside transactions influenced by breach or conflict.
• Courts may remove the trustee if continued office is incompatible with the trust’s interests.

Trustee honesty, reasonableness, or good intentions do not excuse breach. Even if the trust is not harmed or gets a good deal, the strict rule applies.

Relief and protection

• Trustees can seek relief under s 61 Trustee Act 1925 where they acted honestly and reasonably and ought fairly to be excused. This discretion does not apply to dishonest profit-taking or deliberate self‑dealing.
• The trust instrument may contain a valid exemption clause limiting liability for certain non‑fraudulent breaches. Any ambiguity is construed against the trustee.
• Trustees are entitled to reimbursement of proper expenses, and professional trustees can be remunerated if authorised (for example, by trust instrument or statute). Remuneration does not extend to unauthorised profits.

Worked Example 1.3

A trustee secretly earns a commission by placing trust money with a particular bank. The interest rate obtained is better than available elsewhere. Is this allowed?

Answer:
No. Regardless of the benefit to the trust, the trustee may not profit secretly from trust dealings. The commission must be paid to the trust, and the trustee is liable to account even if the bank offered better terms.

Worked Example 1.4

The trustees decide to sell trust land. One trustee bids at the auction through a nominee and wins at a market price. Can the beneficiaries set aside the sale?

Answer:
Yes. This is caught by the self‑dealing rule. A trustee buying trust property, directly or via a nominee, engages a conflict. The sale is voidable at the beneficiaries’ option and can be set aside irrespective of price or fairness.

Worked Example 1.5

A trustee negotiates with a beneficiary to buy the beneficiary’s equitable interest in the trust fund. The trustee discloses all material information, pays full value, and urges the beneficiary to take independent advice. Is the purchase valid?

Answer:
Likely yes, provided the trustee proves fair‑dealing: full disclosure, no advantage taken, and a fair price. Unlike self‑dealing with trust property, a trustee purchasing the beneficiary’s interest can be valid if the transaction is demonstrably fair.

Worked Example 1.6

The trust holds a substantial minority shareholding in a private company. A trustee is appointed to the board and begins receiving director’s fees. Must the trustee account for those fees to the trust?

Answer:
Generally yes. If the directorship and fees arose by virtue of the trust’s shareholding, the fees are an incidental profit of office. The trustee must account unless the trust instrument expressly authorises retention, the appointment was independent of the trust votes, or all adult beneficiaries gave fully informed consent.

Worked Example 1.7

An executor (PR) administering an estate receives a “referrer’s fee” from a broker for placing estate cash on deposit. The beneficiaries later discover this. Can the PR keep the fee?

Answer:
No. PRs are fiduciaries and must not make unauthorised profits from their office. The fee must be accounted for to the estate, and the PR risks removal.

Worked Example 1.8

Trustees wish to grant a lease of trust property to one trustee’s spouse at market rent, on identical terms to independent tenants. All adult beneficiaries receive a full explanation of the proposal, the rent and terms, and consent. Is this permissible?

Answer:
With fully informed consent by all adult beneficiaries with capacity (and no minors or protected parties), a conflicted transaction can be authorised. The trustees must ensure disclosure was complete and consents genuinely free. If any beneficiary lacked capacity or withheld consent, the transaction would remain vulnerable.

Remedies for Breach of Fiduciary Duty

If a trustee breaches fiduciary duties:

• The beneficiary can claim an account of profits (disgorgement) from the trustee.
• Profits made are held on constructive trust for the beneficiaries and can be traced into substitutes where identifiable.
• Transactions involving conflict or self‑dealing are voidable and may be set aside.
• Equitable compensation may be awarded to restore the trust fund to the position it would have been in but for breach.
• The court may order removal and replacement of the trustee.
• Injunctions may restrain threatened breaches (for example, stopping competition with the trust business).

Where trustees rely on safeguards:

• Trustees can seek relief under s 61 Trustee Act 1925 if honest and reasonable, but not for unauthorised profit.
• Proper expense reimbursement is always permitted. Professional remuneration requires authorisation (for example, under Trustee Act 2000 or the instrument).
• Fully informed beneficiary consent can authorise otherwise conflicted conduct, but only with full disclosure and capacity.

Exam Warning

Never justify a trustee's undisclosed profit or conflicted dealing on the basis of fairness or good faith. In SQE2, any profit or conflict without express beneficiary consent is strictly a breach.

Revision Tip

Read all trust fact scenarios slowly in problem questions. Scrutinise trustee conduct for possible profit or conflicts—many breaches happen without overt dishonesty. Be alert to self‑dealing, hidden commissions, director’s fees linked to trust shareholdings, and use of trust information for personal benefit.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees are fiduciaries, always bound by the strict duties of loyalty, no profit, and avoidance of conflicts.
• Any unauthorized or secret benefit from their position is a breach, regardless of trustee intentions.
• Self‑dealing transactions are voidable; purchases of beneficiaries’ interests stand only if full disclosure and fairness are proved.
• Trustees must not compete with the trust business or misuse trust information for personal gain.
• Directors’ fees arising from trust shareholdings must be accounted for unless authorised or independently obtained.
• Informed consent of all adult beneficiaries may excuse a profit or conflicted transaction, but this must be freely and fully given with full disclosure.
• Remedies include account of profits, constructive trust over profits, equitable compensation, rescission, injunctions, and removal.
• Relief under s 61 Trustee Act 1925 may excuse honest and reasonable mistakes, but not unauthorised profits.
• PRs administering estates are fiduciaries; they must avoid conflicts and unauthorised profits in estate management.
• Strict liability applies: proof of dishonesty or loss is not required for a breach finding.

Key Terms and Concepts

• fiduciary
• duty of loyalty
• conflict of interest
• unauthorized profit
• account of profits
• constructive trust
• informed consent
• self-dealing rule
• fair-dealing rule
• personal representative (PR)