Per Jack: "The Regulations do raise a separate question (as they limit the categories of who can legally purchase bonds) if a purchaser who is apparently eligible is actually not, by a misunderstanding or (as Malcolm puts it) skullduggery, because whether as a trustee or not, he is buying for another where this is not permitted by the Regs. Does this ever invalidate the purchase so that the relevant bonds never become trust property, for AML or any other purpose?
Regulation 11 seems to answer this question: “Terminating investment in bonds” provides in part:
"11.—(1) The Director of Savings may terminate a holder’s investment in a bond, including where—
(a)the holder purchases or holds the bond in contravention of regulation 4 (persons entitled to hold bonds) …
(b)the Director of Savings reasonably suspects that the holder—
(i)has provided false information; or
(ii)holds the bond in connection with an illegal purpose.
(2) Where the Director of Savings terminates a holder’s investment in a bond under paragraph (1)—
(a)the purchase price of the bond must be repaid to the holder; and
(b)any other amount payable in relation to the bond may be paid to the holder as the Director of Savings considers appropriate".
Excellent analysis from Malcolm and Jack. Way above my pay grade.
For me the bond is owned by the child - legally and so are any winnings. No need for decleration of trusts etc.
The winnings paid - are held by the responsible adult and the terms of which are ambiguous, the SI does not create a trust (Jacks comments)., thats not to say a trust is created by: other means/regs/common law/case law. (Agree with Malcolm)
S.73 provides indemnity for the Director of savings on any payments made. The argubley ambiguous drafting means NS&I wont be dragged into any issues.
I think the legislation does allow payments from a trust - one route could be, set up a trust to make the minors payment - the winnings would be paid to the trust. Not sure if thats helpful or creates further issues.
You’re correct. In fact, NS&I has recently run a campaign of returning cash investments but reclaiming Premium Bonds prizes where parents have been using someone else’s ‘allowance’ or provided false ID. I think they must have relied upon these clauses to do so.
I’ve dealt with a situation where an office syndicate had pooled their cash to buy Premium Bonds and won the £1m prize.
NS&I would only acknowledge the single individual person who held the account. That person accepted that she was holding her colleagues cash and prizes on trust, which had been verbally agreed - although there was documentary evidence of a schedule showing the breakdown of entitlement to prizes.
The responses to my question have been really helpful and far more detailed than I’d expected, However, I’m still not clear whether it is an implied trust where a ‘responsible person’ legitimately holds Premium Bonds for a child (typically funds from themselves or a grandparent as a gift to the child). I accept that the NS&I regs do not creat a trust but you also point out that they do not prevent a trust being created.
If it is an implied trust, presumably it’s created when the child’s account is first opened?
Is the right course of action for the ‘responsible person’ to create a declaration of trust to formalise the arrangement and provide protection in situations where, for example, responsible person died?
Presumably a constructive trust would achieve the same outcome but would require a court order!
If the ‘responsible person’ shares the prize with other family members, is it breach of trust, as suggested by other contributors?
An early much-loved mentor in my tax career described me as “half decent technically but nothing if not prolix”. I therefore hazard another go!
1 Enforcement.
I raised this matter only in principle without detailed research as being cognate to the main issue in 2 below but somewhat out of scope, albeit important. Also because this is not the forum for a dissertation (in which I tend to be a culprit).
Malcolm has cited Reg 11. Robin provides essential intelligence about enforcement policy. Richard cites Reg 73. In summary NS&I can enforce its rules on who can buy bonds (with a discretion to relax) and is thoroughly protected from claims that it has misbehaved in applying them (though JR must be on if they are Wednesbury unreasonable as to any exercise of discretion but not any performance of statutory duty). Though NS products are not regulated* (article 78, RAO)* NS&I is covered by the Financial Ombudsman Service.
If the body has a settled policy on enforcement of rule breaches it surely has a moral obligation to publish it. I can find no sign of it, or of the campaign cited by Robin, on the website in the section for Advisers or for the hapless proletariat. Compare the voluminous similar publicity HMRC showers on taxpayers. I echo Patrick’s plaintive lament. The strict legal position will be terra incognita for 99% of investors buying bonds for another, not least for my grandchildren, including her indoors.
2 Trusts
Robin is still perplexed as no doubt are others. NS&I furnish pathetically inadequate info in their website Adviser Centre. https://www.nsandi-adviser.com/trusts
https://www.nsandi.com/files/asset/pdf/trust-faqs.pdf
My edition of Underhill runs to 1446 pages. In brief therefore my summary. Reg 71 prevent NS&I from acknowledging trusts wrt bonds (though some NS products can be acquired and held by trustees). The Regs do not create a trust but are not to interefere with them:Regs 76 and 77. Purchase by trustees contrary to the rules invites enforcement. The links above are utterly useless in identifying what “trust” means. If a purchase is made on behalf of another within the rules it seems very likely that if a trust is then created later it would be a breach of the rules if that trust could not have lawfully made the original purchase. Deliberate such action might appear foolhardy evasion to one exercising enforcement discretion, whereas ignorance of the rules might not, especially given the inadequate publicity about both the rules and their enforcement. As a non-taxable express trust is in TRS for AML, transparency will reveal its non-deniable existence, or risk AML penalties.
Whether and what kind of trust, if any, arises as a matter of law when a person buys bonds for another (within or outwith the rules) depending on whether a simple outright gift or something more complex is either intended contemplated or executed is a matter for Underhill (or Lewin) or a specialist adviser instructed with all the facts (and not a selection). Malcolm’s Option 3 is convoluted but an entirely realistic “what if” of the type of glorious intricacies lay clients can blunder into where Jack would fear to tread.
In 99% of cases such purchases will create no problems either of enforcement or ownership and as Richard implies the child will get the bonds or the proceeds to spend at 16 or have them properly spent for his or her benefit before then. He does not address my point that as well as the bonds the child might be entitled to a £1m jackpot. I believe that the Director of Savings has a moral responsibility to address this low probability event and his then likely attitude and response, any official embarrassment plus adverse effect on savers, and, if he is immune by statute to direct legal action or involvement in legal actions among third parties should the child spend the jackpot irresponsibly, whether it will be an overall good look. As in purblind HMG being the only shareholder in the Post Office (of Horizon IT system fame). I am going to ask him.
It does often become difficult to follow arguments set out in a relatively large number of posts which often veer off into other albeit related directions. For what it’s worth, and without a whole host of ifs and buts to avoid prolixity I conclude with the following:
The concept of the constructive trust at its simplest is that it arises only by operation of the law where a person’s acts are unconscionable. In the present discussion I think the constructive trust issue is therefore a red herring.
Having said this, it might well arise if, for example, the parent (P) who subscribed for the bonds did so as prescribed by Reg 4(4) (ie on behalf, say, his minor son (S)) and, following a win of £1m, decided to keep the winnings for himself (ie P) refusing to pass the monies over to S or to spend it on S’s behalf and for his benefit.
From the perspective of the NS&I I believe the Regs are merely intended to provide for the mechanics of purchase (and claiming winnings etc). Their prime concern is to allow NS&I to identify who possesses the legal title to the bonds.
However, having said this, I suspect that any court in the light of the Regs, P’s conduct and identifying his real intention (eg “I’m buying these bonds for S”) is likely to conclude that P intended (even if he did not know that this is what he was doing at the time of purchase of he bonds) to create a trust and did so; that he had an express intention to do so [Paul v Constance [1977] and Jones v Lock [1865] may be worth a read].
I believe that in practice the safest course of action is for P, at the time of purchase, to explicitly execute a declaration of trust in favour of S I(whether that be a bare trust or a more substantial trust).
Section 3 of the Application to buy form requires the application to say who the bonds are for. If the applicant answers for himself or a child (giving his details as parent in section 4) such evidence will be highly persuasive of initial ownership unless he is prepared later to challenge his own statement. It is not conclusive. There is plenty of case law to be applied to the facts and other evidence of intention to be weighed. including the still unabolished and much criticised presumption of advancement. In Option 3 if P applied to buy for himself, and later strenuously maintained that stance, telling W he bought them for his son (and so, allegedly, told NS&I a whopper or made a mistake on the form) might not be decisive. But the example is hypothetical and would depend on the real facts and the real evidence. Subject to those same things if he had stated on the form he was buying for S it might be hard for P to rebut the presumption by asserting his own mistake or worse a fib (unclean hands!).
This news report refers to NS&I’s campaign to clamp down on customers buying more than the £50,000 limit, which includes buying them in their child’s name: