A candidate emailed us last month with a question that captures the whole problem. She had learned the three certainties inside out, could recite Knight v Knight in her sleep, and then sat a mock paper where four of the six trusts questions were about a trustee who had sold shares without advice, paid the proceeds into his personal current account, and bought a racehorse. She scored one out of six. Her comment: "I knew the trust was valid."
That is the reality of Trusts Law in SQE1 FLK2. Formation is the easy half. The marks sit in what happens afterwards — the duties trustees owe, what goes wrong, and what the beneficiaries can actually recover. This article works through that second half in the order the exam tends to hit it.
Trustees' duties in FLK2: investment, delegation and the statutory duty of care
Start with the framework, because almost every trustee-conduct question in SQE1 runs through it. Section 1 of the Trustee Act 2000 imposes a duty of care: such care and skill as is reasonable in the circumstances, taking account of any special knowledge or experience the trustee has or holds out as having. A retired accountant appointed as a lay trustee is judged more harshly on the accounts than a well-meaning neighbour. A professional trustee acting in the course of a business is judged more harshly still.
3 gives trustees a general power of investment — they may invest as if absolutely entitled, subject to any restriction in the trust instrument. But that power comes with conditions. Section 4 requires trustees to have regard to the standard investment criteria: the suitability of the investment and the need for diversification, given the circumstances of the trust. Section 4(2) requires periodic review. Section 5 requires proper advice unless the trustee reasonably concludes it is unnecessary or inappropriate.Watch the causation trap here. In Nestle v National Westminster Bank plc the bank's investment policy was genuinely poor, yet the claim failed because the beneficiary could not show loss flowing from it. Bad process alone is not a claim. The examiners love a fact pattern where the trustee behaved sloppily but the fund still grew — the correct answer is that no compensation is payable.
11–15. Trustees may delegate most functions to an agent, but not the "core" ones: how assets are distributed, whether fees are payable from income or capital, appointment of trustees, and delegation itself.15 requires a written agreement and a policy statement. Sections 22 and 23 impose a duty to keep the arrangement under review, and a trustee who does so properly is not liable for the agent's default.Exam habit worth building: whenever an SQE1 stem mentions a trustee doing something with money, silently ask three questions. Did they have the power? Did they exercise it properly? Did loss result? Most distractors fail on only one of the three.
Fiduciary duties: conflicts, unauthorised profits and remuneration
Trustees are fiduciaries, which means two negative rules dominate. The no-conflict rule (Bray v Ford) and the no-profit rule. Both are strict — good faith is not a defence, and the fact that the trust benefited is not a defence either.
Keech v Sandford remains the cleanest illustration: a trustee who renewed a lease for himself, after the landlord refused to renew for the infant beneficiary, held it on constructive trust. Boardman v Phipps takes it further — the solicitor and beneficiary acted honestly, made the trust a great deal of money, and still had to account for their personal profit, receiving only a generous allowance for their work. If an MCQ tells you the trustee "acted in good faith and the trust suffered no loss", that is usually a signpost towards liability to account, not away from it.
Self-dealing is voidable by any beneficiary within a reasonable time, regardless of fairness of price. The fair-dealing rule (purchasing a beneficiary's equitable interest) is less absolute — the transaction stands if the trustee proves full disclosure, no advantage taken and a fair price.28–29 Trustee Act 2000 allow charging clauses to be honoured and give professional trustees a statutory entitlement to reasonable remuneration where there is no such clause, provided a lay co-trustee agrees in writing.
Maintenance and advancement: ss.31 and 32 Trustee Act 1925
These two sections generate a disproportionate share of Trusts questions, probably because they reward precision. Section 31 deals with income. While a beneficiary is a minor, trustees have a discretion to apply income for that child's maintenance, education or benefit, and must accumulate the surplus. On reaching 18, the beneficiary becomes entitled to income as it arises, even if capital remains contingent — provided the gift carries the intermediate income.
Section 32 deals with capital: trustees may pay or apply capital for the advancement or benefit of a beneficiary with an interest in capital, whether vested or contingent. Two points candidates routinely lose marks on. The advance is brought into account against that beneficiary's eventual share. And the old one-half cap now applies only to older trusts — for trusts created or arising on or after 1 October 2014, the Inheritance and Trustees' Powers Act 2014 raised the limit to the beneficiary's whole presumptive share. Any prior life tenant must consent in writing.
Also keep Saunders v Vautier to hand. Where all beneficiaries are of full age, of sound mind and between them absolutely entitled, they can collapse the trust and direct transfer, whatever the settlor intended. It is a favourite in questions where a frustrated adult beneficiary wants the fund now.
Breach of trust: equitable compensation, defences and section 61 relief
Where a breach causes loss, the trustee must restore the fund. The modern approach was settled in Target Holdings Ltd v Redferns and confirmed by the Supreme Court in AIB Group (UK) plc v Mark Redler & Co: compensation is measured by the loss actually caused by the breach, assessed with hindsight at the date of judgment, not by a mechanical reconstitution of what left the account. Common law rules on remoteness do not apply, but a "but for" causal link does.
Trustees are liable jointly and severally, with rights of contribution between them under the Civil Liability (Contribution) Act 1978. A trustee is not vicariously liable for a co-trustee's breach, but will be liable for their own failure to supervise or for standing by.
Now the defences, because SQE1 rarely asks a bare liability question:
- Exemption clauses — effective even for gross negligence, but never for fraud or dishonesty (Armitage v Nurse). 62 Trustee Act 1925 the court may impound the interest of a beneficiary who instigated the breach.
- Section 61 Trustee Act 1925 — the court may relieve a trustee who acted honestly and reasonably and ought fairly to be excused. Professional trustees rarely succeed. 21(3) Limitation Act 1980, but no limitation period at all for fraudulent breach or for recovering trust property still in the trustee's hands.
Tracing in SQE1: mixed accounts and proprietary claims
If the trustee is bankrupt, a personal claim is worthless. That is why tracing matters, and why FLK2 questions so often end with "the trustee has no other assets". Equitable tracing requires an initial fiduciary relationship, which a trust obviously supplies.
Where the trustee mixes trust money with his own in one account, the rules favour the beneficiary. Re Hallett's Estate presumes the trustee spent his own money first. Re Oatway allows the beneficiary to claim a charge over an asset bought from the mixed fund where the remaining balance was later dissipated. Roscoe v Winder caps recovery at the lowest intermediate balance — money paid in later is not automatically trust money. And under Foskett v McKeown, the beneficiary may elect to take a proportionate share of a rising asset rather than a mere charge, which is where the racehorse (or the life policy) becomes valuable.
Where two innocent claimants' funds are mixed in a current account, the rule in Clayton's Case (first in, first out) is the default, but Barlow Clowes International Ltd v Vaughan shows the courts will readily displace it in favour of a pari passu distribution where FIFO would be impractical or unjust. Tracing stops where the value disappears — you cannot trace into an overdrawn account (Bishopsgate Investment Management Ltd v Homan), and a bona fide purchaser for value without notice takes free.
Third parties are the last piece. Dishonest assistance requires a breach of trust, assistance, and dishonesty judged objectively against what the defendant actually knew (Royal Brunei Airlines v Tan, refined by Ivey v Genting Casinos). Knowing receipt requires beneficial receipt of trust property and knowledge making retention unconscionable (BCCI v Akindele). Both are personal claims — a distinction the SBA distractors exploit constantly.
How to drill Trusts Law before your SQE1 sitting
Three concrete habits. Build a one-page flow: breach identified → loss caused? → defences → personal claim → proprietary claim → third parties. Redraw it from memory twice a week. Second, practise with numbers — write out a five-line bank statement and apply Hallett, Oatway and Roscoe to it until the arithmetic is automatic, because SQE1 will give you figures and expect a single correct sum. Third, whenever you get a trusts question wrong, log which stage of the flow you skipped rather than which case you forgot. Most errors are structural, not doctrinal.
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