"Stangely worded" trust deed


(Richard Jones) #1

I’m dealing with an unusual situation consisting of the following.

Trust deed agreed in 1993 under UK law by two non-resident settlors/trustees.

There is also a “beneficiary” to the trust who is UK tax resident and deemed domiciled.

Trust consists of shares in a Jersey company settled by the trustees. The company holds a single commercial property in London.

Extracts from the trust deed:

“The shareholding in the company is vested in the trustees in proportions 10% in favour of trustee X and 90% in favour of trustee Y”. NB this is to ensure that the trustees are beneficially entitled to dividends derived from rental income earned by the company on renting out the property.

“The trustees declare that, in the event of a disposal they shall hold the net proceeds of sale in the shares upon completion in trust for the beneficiary.”

“The trustees hereby declare that they shall transfer title in the shares at any time in the future in such manner and to such person as the beneficiary shall in his absolute discretion direct.”

It therefore appears that the beneficiary has absolute power to direct that the shares are transferred to him (or anyone else).

What effect do you believe this trust has under UK tax law? The question I have been asked by the beneficiary is “what happens if I break this trust and acquire the shares in my absolute name?”

Having considered this, my initial view is that this merely a bare trust arrangement, given the beneficiary’s absolute right to acquire title to the shares. Hence, from a CGT perspective, whether the shares are sold whilst in the trust or in his name, he would be subject to UK CGT on any gain arising.

Do you have any alternative views?

Richard Jones
Harris & Trotter


(Paul Saunders) #2

Whilst I appreciate it seems a bit “picky”, there is no UK Law as such governing trusts, the laws of England & Wales, Scotland and Northern Ireland that relate to trusts are self-standing and it is necessary to identify which particular law applies to the case in hand, as the answer may differ between the separate jurisdictions. (Curiously, I have generally noted that it is US lawyers who draft trust documents referring to “UK LAW” whilst insisting that the US la applicable is that of a particular state!)

Regardless of the applicable trust law, I agree that the wording is rather unusual.

My interpretation of the wording quoted is that X any Y have a right to the income, to the exclusion of the Beneficiary, with the Beneficiary’s right arising only upon a disposal (of the shares, or of the underlying property?).

The power of the Beneficiary to direct a transfer of “title in the shares” seems to refer only to the legal interest, not the beneficial entitlement. However, if it does extend to the beneficial ownership, then this would appear to be a general power of appointment and, therefore, “property” in his estate for IHT purposes. However, for CGT purposes, I anticipate that any charge would fall on X and Y, whether as trustees or personally may depend upon the circumstances that existed at the time the trust was made in 1993.

A rather curious trust, in respect of which I suspect there will be varying views.

Paul Saunders