Trust deeds for the self-employed

If you are a sole trader in Scotland, a protected trust deed can deal with your business debts as well as your personal ones, because you are personally liable for both. Whether you can keep trading is a decision for your trustee, who has to act in the interests of your creditors. Your monthly payment is worked out from what you can draw from the business after its running costs.

Can I get a trust deed if I am self-employed?

Yes, being self-employed does not rule it out. The same conditions apply as for anyone else, with one point that matters more for business owners.

The connection to Scotland. Since 1 July 2024, the Bankruptcy (Scotland) Act 2016 says you need a sufficient connection to Scotland. For an individual, that means either:

• you were habitually resident in Scotland (it was where you normally lived) at any time in the year before you sign the trust deed, or
• you had an established place of business in Scotland within that year

So someone who lives elsewhere in the UK but runs an established business in Scotland may still meet the test. Whether your business counts is something the insolvency practitioner has to check.

The other main conditions are that you owe at least £5,000 in total, and you are not currently bankrupt. See who can get a trust deed for the full list.

Does it matter how my business is set up?

Yes. Guidance from the Accountant in Bankruptcy (AiB), the Scottish Government agency that supervises trust deeds, sets out who can grant a trust deed:

Sole traders. Business Debtline explains that as a sole trader you are personally liable for your business debts. That is why they can go into your personal trust deed alongside things like credit cards and loans.

Partners. AiB says a trust deed granted by a partnership does not protect the partners from bankruptcy for their personal debts, and does not discharge them personally from the partnership’s debts.

Company directors. A personal trust deed deals with debts you owe personally, which can include anything you have personally guaranteed for your company. Ask the insolvency practitioner, or Business Debtline, which of your business debts are yours. Your trust deed may also restrict you from being a company director, so check this before you sign. See will a trust deed affect my job?

What happens to my business?

Your trustee has to decide how to deal with your business. The professional standard for insolvency practitioners, Statement of Insolvency Practice 3.3, says the trustee should consider whether trading should continue and on what terms, and that a decision to keep trading should be backed by cash flow and trading forecasts. The insolvency practitioner may also want to visit your business premises before the trust deed starts.

Citizens Advice Scotland warns that you might not be able to carry on running your business: the trustee might arrange for someone else to run it, or might sell it. This is a real risk, and you need a clear answer about your business before you sign.

Tools and equipment. AiB’s guidance says items that cannot be taken by creditors under Scotland’s attachment rules are not passed to the trustee. Those rules protect tools and equipment you reasonably need for your trade, up to a value limit. Ask the insolvency practitioner how this applies to your tools and equipment. For a van or car you need for work, see your car and a trust deed.

Keeping business utilities on. AiB’s guidance says a trustee can ask for gas, electricity, water or telecoms to be supplied for your business. The supplier can ask the trustee to take responsibility for the ongoing bills, but cannot insist on old arrears being paid first as a condition of supply.

How is my monthly payment worked out?

Contributions are set with the Common Financial Tool, the budgeting method used across Scotland’s statutory debt solutions. AiB’s guidance on the tool explains how it works for self-employed people:

1. The tool has no categories for business costs, so a business budget sheet is drawn up to show what it costs to run your business.
2. From that, you work out how much you can draw from the business.
3. That drawing goes into the tool as your income, alongside any other household income, and your contribution is based on what is left after allowed living costs.

If you do not have an accountant to prepare a business budget, AiB’s guidance points to Business Debtline, which gives free advice to self-employed people on 0800 197 6026 (Monday to Friday, 9am to 8pm).

Where income goes up and down, for example with seasonal work, AiB’s guidance says it may be fairer to average it over a longer period, up to 12 months. Your contribution is reviewed at least once a year, and you must tell your trustee if your income changes in between.

What about tax and HMRC?

Tax you already owe to HMRC is a debt like your others. HMRC is sent the trust deed papers and can object in the same way as other creditors.

Some tax debts are treated as preferred debts, which are paid before ordinary creditors. Under Schedule 3 of the Bankruptcy (Scotland) Act 2016, these include VAT and some tax you deducted from payments to other people, such as money taken from employees’ wages. AiB’s guidance says any debt that would be preferred in a bankruptcy should be treated as preferred in a protected trust deed too. Income tax you owe on your own profits is not one of the preferred debts listed.

Tax on income you earn after you sign is a new liability. Debts that arise after the trust deed is granted are not written off, so you need to keep up with your tax returns and payments for the period after you sign. Build this into your business budget from the start. See which debts can go into a trust deed for what is and is not covered.

What other options are there if I am self-employed?

A trust deed is one option among several, and an adviser needs to look at your business and personal finances together before anyone can say what might suit you:

• The Debt Arrangement Scheme (DAS) lets you repay debts in full through a debt payment programme, with interest, fees and charges frozen, and you do not have to sell your home or car.
• Sequestration (bankruptcy) usually ends after 12 months, but brings restrictions, including not being able to act as a company director.
• The Minimal Asset Process (MAP) is for people with a low income and few assets, and has no fee.
• An informal arrangement with your creditors is not legally binding.

Free, impartial advice is available, including from Business Debtline for self-employed people. See free debt advice in Scotland.

Official sources

• Bankruptcy (Scotland) Act 2016, section 164 (who can have a protected trust deed, including the connection to Scotland)
• Bankruptcy (Scotland) Act 2016, Schedule 3 (preferred debts, including certain HMRC debts)
• AiB Notes for Guidance, protected trust deeds (sections 2.1, 2.10, 6.9 and 6.11)
• AiB Notes for Guidance, Common Financial Tool: section 3, Income (self-employed income)
• Statement of Insolvency Practice 3.3 (Scotland): trust deeds