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Breach of Trust and Remedies for SQE1

Part of our SQE1 Trusts guide → View the full SQE1 Trusts guide

24 Apr 2026

When a trustee acts outside their powers or breaches a duty, the beneficiaries have a range of remedies. SQE1 tests your ability to identify the breach, choo...

Breach of Trust and Remedies

Trusts > Breach of Trust and Remedies

Candidates often lose marks because they confuse the remedy for personal loss (equitable compensation) with proprietary remedies (tracing or constructive trusts), and they overlook statutory defences such as consent or limitation periods.

What Is Breach of Trust and Remedies in SQE1?

A breach of trust occurs when a trustee fails to perform a mandatory duty or exercises a power improperly (not for the proper purpose or with the duty of care). Breach is not confined to dishonesty; it includes honest breaches where the trustee made an error or failed to comply with the law.

Remedies for breach fall into two categories. Personal remedies are claims against the trustee for loss. Proprietary remedies are claims against trust property or its traceable proceeds; they are available if the trust property can be followed into the hands of third parties.

Understanding trustee duties and powers is essential to identifying breaches, and understanding liability of strangers to the trust is essential to identifying when proprietary remedies extend beyond the trustee.

Key Principles for SQE1

  • Breach: What Constitutes It: A trustee breaches trust by failing to perform a mandatory duty. Examples include failing to invest prudently, failing to maintain impartiality between beneficiaries, failing to account, or exercising a discretion for an improper purpose. Breach does not require dishonesty. An honest but negligent breach is still a breach.

  • Personal Liability of Trustee: A trustee who breaches trust is personally liable to the beneficiaries for loss caused by the breach. The beneficiary must prove that the breach caused loss and must quantify the loss. For example, if a trustee invests imprudently and causes a shortfall, the beneficiary can claim the amount of the shortfall as compensation.

  • Equitable Compensation: The court awards equitable compensation to put the beneficiary in the position they would have been in had the breach not occurred. This is conceptually similar to damages but applies to equitable wrongs. The measure is loss caused by the breach, not the trustee's gain.

  • Account of Profits: In some cases, a trustee may have made a profit from breach (e.g., by investing in a property the trustee knew would appreciate and keeping the profit). The beneficiary can require the trustee to account for the profit. This is a proprietary remedy in effect, giving the beneficiary a claim to the profit.

  • Tracing: If trust property is transferred by the trustee or its proceeds are mixed with the trustee's own property, beneficiaries can trace the property and claim against whoever holds it. Tracing at common law follows legal title (cash must be followed in specie); tracing in equity can follow mixed funds under the Clayton's Case rule and more flexible modern approaches. Tracing is a remedial mechanism, not itself a remedy; the beneficiary must have a proprietary claim.

  • Constructive Trust as Remedy: Where trust property is transferred to a third party, the court may impose a constructive trust on the recipient if the circumstances are such that it would be unconscionable for the recipient to retain the property beneficially. This is particularly relevant where the third party received the property knowing of the breach.

  • Defences to Breach of Trust: Consent: A beneficiary cannot sue for breach if they consented to the breach. Consent must be informed and given freely, not under duress or misrepresentation.

  • Defences: Limitation Period: Claims against trustees are subject to limitation periods. A claim for breach of trust must generally be brought within six years of the breach (Limitation Act 1980, s.21(3)), though there are exceptions for fraud and where the beneficiary did not know and could not with reasonable care have discovered the breach.

  • Defences: Trustee Act 1925, s.61: The court has discretion to relieve a trustee from liability if the trustee acted honestly and reasonably and ought to be excused. This is not a full defence but a discretionary relief. The trustee's conduct must have been honest and the beneficiary must not have suffered significant loss.

Exam tip

A frequent mistake is assuming that because a breach occurred, the trustee is automatically liable in full. In fact, the beneficiary must prove loss. If a trustee breaches the duty of care but the trust property increases in value, there is no compensable loss. Additionally, consent or limitation periods can bar claims. Always ask: what loss was caused by the breach, and is there a defence available?

How This Appears in SQE1 Questions

A scenario might be: "T, a trustee, invested 50% of the trust fund in shares in a start-up company, contrary to the terms of the trust which required diversification. The shares increased in value by 30%, while a diversified portfolio would have increased by 15%. Can the beneficiaries claim compensation?" The answer requires understanding that the beneficiaries suffered no loss (the trust fund increased in value), so equitable compensation is not available, though the trustee did breach the duty to invest prudently.

This is a classic SQE1 trap.

Common Mistakes Students Make

  • Confusing breach of trust with loss; a breach has occurred if the trustee failed to perform a duty, regardless of whether loss resulted
  • Assuming equitable compensation is available whenever a breach is proved; the beneficiary must prove loss caused by the breach
  • Treating tracing as a remedy in itself; it is a mechanism to follow property and is relevant only if the beneficiary can establish a proprietary claim
  • Overlooking the defence of consent; if the beneficiary consented to the trustee's conduct, no breach action lies
  • Misunderstanding s.61 TA 1925; it does not excuse dishonest conduct, and relief is discretionary based on reasonableness

Quick Summary

  • Breach of trust occurs when a trustee fails to perform a mandatory duty or exercises a power improperly; dishonesty is not required.
  • Personal remedies require the beneficiary to prove loss caused by the breach; equitable compensation puts the beneficiary in the position they would have been in absent the breach.
  • Account of profits is available if the trustee profited from the breach; tracing is a mechanism to follow trust property and is relevant to proprietary claims.
  • Constructive trusts can be imposed on third party recipients if the circumstances make retention unconscionable.
  • Defences include beneficiary consent, limitation periods (generally six years), and s.61 TA 1925 relief for honest, reasonable conduct.

Want to test this now? Try a few SQE1-style questions below before moving on.

Test Yourself

Test yourself

Quick check questions based on this article.

Question 1

Scenario

A trustee invests trust funds in a property development scheme that fails, causing a loss of £80,000 to the trust. The trustee sought professional investment advice before making the investment and followed the advice carefully. The investment appeared reasonable at the time but was adversely affected by an unexpected and severe economic downturn. The trustee acted honestly throughout and believed the investment was in the best interests of the beneficiaries. The beneficiaries bring a claim for breach of trust. The trustee admits that the investment was outside the scope of the investments authorised by the trust instrument. The trustee's solicitor advises that the court has a discretion to relieve trustees from personal liability in certain circumstances. No exclusion clause exists in the trust instrument.

Which of the following best describes whether the court may relieve the trustee from liability?

Question 2

Scenario

A trustee holds £60,000 in a trust bank account for the benefit of two beneficiaries in equal shares. In breach of trust, the trustee withdraws £40,000 from the trust account and pays it into his personal current account, which at the time of the payment contains £10,000 of his own money. The trustee then uses £25,000 from his personal account to purchase shares in a listed company. The shares are purchased in the trustee's own name. After the purchase, £25,000 remains in the personal account. The shares subsequently increase in value to £50,000. The balance in the personal account remains at £25,000. The trustee spends £5,000 from his personal account on a holiday. The remaining balance in the personal account is £20,000. The beneficiaries discover the breach and seek to trace and recover the trust funds. The trustee has no other assets of significant value. The trustee's employer has recently made him redundant, and he is experiencing financial difficulties. The £20,000 remaining in the trust bank account has not been touched. The trustee's personal account has not received any deposits other than the £40,000 misappropriated from the trust. The listed company in which the shares were purchased has announced a takeover bid, which has further increased the share price. The beneficiaries wish to claim the most advantageous remedy available to them.

Which of the following best describes the most advantageous claim available to the beneficiaries in respect of the shares?

Question 3

Scenario

A trustee of an express trust made an unauthorised investment eight years ago, resulting in a loss of £75,000 to the trust fund. The investment was in speculative cryptocurrency assets, which the trust deed did not authorise. The beneficiaries, who are three adult children of the settlor, discovered the loss five years ago but took no action at that time because the trustee promised to make good the loss from personal funds. The trustee has now informed the beneficiaries that he is unable to repay the £75,000. The beneficiaries wish to bring a claim for breach of trust. The trustee argues that the claim is time-barred because more than six years have passed since the breach occurred. The trust deed does not contain any provision extending or modifying limitation periods. The trustee did not personally profit from the unauthorised investment. The cryptocurrency assets were purchased in the name of the trust and subsequently lost their value. The trustee disclosed the investment to one of the three beneficiaries at the time it was made, but the other two were not informed. The beneficiaries did not obtain legal advice until after the trustee informed them he could not repay. The trustee has acted honestly throughout and genuinely believed the investment would be profitable. The trust was created twenty years ago and the trustee has served since inception.

Which of the following best describes the limitation position for the beneficiaries' claim?

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