If A B are the legal owner of freehold property and wish to give all of the beneficial interest in the property to C D E, and A B do so by executing a deed of Declaration of Trust, does it matter if C D E do not countersign the same document to acknowledge the gift of beneficial interest (assuming that there is no supporting evidence anywhere else that communicated the gift to them)?
Is there a legal requirement* upon A B or C D E to register the Declaration of Trust (a bare trust) with HM Land Registry or even TRS?
*The parties are duly advised of asset protection implications and ongoing personal tax implications for C D E
No, no need for CDE to be parties.
Yes, assuming the revised system is up and running by then, the trust will need to be registered with the TRS by March 2022. Joint ownership of property is only excluded where the legal and beneficial owners are the same people.
Whilst I do not believe there (yet) to be a legal requirement to register the declaration of trust with HMLR, are any of C, D or E aware of the gift?
I recall that there are a number of cases where a declaration of trust has been made, but which has been declared to have no effect as it was held in the proverbial drawer without the named beneficiaries being informed of the purported gift.
The principle applies not just to land but to other assets – I think there was a case called Taylor v. commissioners of the Inland Revenue in which a building society account was secretly put into joint names with an either to sign mandate and which the court decided could not have been gifted as the purported beneficiary had no knowledge of the “gift”. This was, of course before financial institutions needed to complete AML checks, etc. on clients.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
My concern is that if HMRC could allege that the donees had no material knowledge of the gift that the gift was an incomplete gift and remains in the donors’ estate.
At the same time what constitutes knowledge of a gift? Clearly evidence of communication would, e.g. a donee signing as a counter-signatory to a declaration of trust, however I wonder what else would be acceptable, e.g. a donee recounting an oral conversation? Also what if the donee was a minor?
I am not aware of any case law or arguments of any public authority which require the existence or contents of a declaration of trust to be communicated to anyone. A beneficiary who becomes aware can always disclaim and prior lack of knowledge does not inhibit that. I can see potential for abuse though a valid will (witnessed by the transient and unmemorable though real) can be kept in a drawer without informing beneficiaries or executors or providing copies to anyone and there is no register. This may be wholly undesirable but that is a separate issue. Soon the trust declared will have to be registered to avoid sanctions if not exempt but if not the document is not thereby invalidated or made inadmissible in evidence. A potential minefield for a home-made document, as for any similar including a will, but the law can scarcely be formulated on a lowest common denominator basis for those who choose not to be properly advised.
Just to clarify the point that Jack questions – the issue has been considered in insolvency proceedings and, where the intended beneficiaries have not been aware of the “gift”, the “gift” has been declare void as an attempt to defraud creditors.
It might be a potential minefield even where the documentation is professionally drafted, as the argument could be advanced by anyone who might otherwise be disadvantaged by any gift of which the donee(s) are unaware. It’s not just creditors who could feel disadvantaged by a “secret” gift.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Endorsing more or less all of what has been said particularly that it sounds like a recipe for disaster, I guess it’s another case of let’s see the document (actual or proposed); wouldn’t it “normally” have a receipt coupled with other obligations like the donor undertaking to the donee to indemnify them against any mortgages debt and to undertake to transfer the property to them at their request? If its bare of all that, what does it actually say? I do accept that it doesn’t have to be a “normal” document, doesn’t have to provide for who pays a mortgage if there isn’t one, etc but wonder just how bare it will be. May I also ask if there is any implication in the words “…the same document…”? is there to be another document, comprising a receipt off the record/behind the curtain or anywhere else? or are the donees to be truly in the dark, for the time being?
The insolvency jurisdiction to defeat gifts only applies to gifts that would otherwise be valid. If that were not so there would be no occasion to overturn them. A decision by the Court whether to make an order under s423 IA 1986, which specifically involves being satisfied about the purposes of making the settlement, may well take into account the secrecy of its creation but that is a long way from any general principle that such secrecy vitiates the essential validity of the transaction.
Avoiding conflation of legal points is crucial when dealing with an opponent like HMRC whose main focus is on ends regardless of means with their infuriating constitutional niceties. They are simply not entitled to deny validity to a DOT just because no beneficiary has been informed and if they wish to invoke the insolvency provisions, or any other such setting-aside remedy where they have standing, they must initiate proceedings or credibly threaten to do so. Ipse Dixit is something they believe in implicitly but it is not yet the law.
So long as the so-called “three certainties” are satisfied the declaration of trust is valid. The trustees are under a duty to inform the beneficiary(ies) who are sui juris of the existence and terms of the trust Hawkesley v May [1956]; Brittlebank v Goodwin [1868]
With respect to Graham’s concern, “My concern is that if HMRC could allege that the donees had no material knowledge of the gift that the gift was an incomplete gift and remains in the donors’ estate”, on the basis the trust has been validly created there is no incomplete gift. The trust property no longer forms part of the donor’s estate for IHT.
However, what I’m not sure about is whether if the beneficiary(ies) are not informed and are unaware of the trust’s existence whether a trust has in fact been created at all which, if not, would prima facie suggest that the property does remain in the donor’s estate [Armitage v Nurse [1998]]?
Not sure, Malcolm, what Armitage v Nurse [1984] would bring to HMRC’s supposed argument, which the way it is depicted borders on the fabulous assertion of a sham, to the extent that the beneficiaries were unaware of the trust. I may be missing your point.
The beneficiary of settled agricultural land in that case knew she was a beneficiary, she appears to have had no access to the trustees’ documentation. It was a question of whether and on what basis the pleadings were amendable at that stage to plead “fraud”:
“and that, accordingly, since without amendment the pleadings could not support a plea of fraud, clause 15 of the settlement operated to absolve the trustees from liability for the alleged breaches so long as they had not acted dishonestly; but that the plaintiff would be allowed to examine the trust documents and investigate the trustees’ management in order to re-amend her statement of claim.”
There was no question of the settled property remaining in the settlor’s estate by definition.
If the trust is constituted by delivery of the property to the trustees, it is constituted, even if it might be what is inaccurately termed a sham. The sham or fictional trust argument does little more than revise an apparent trust into a bare trust for the purposes of an insolvency or ancillary relief proceedings in any event and involves more than the beneficiaries simply being unaware.
The existence of an “object”, the beneficiaries, is all that is needed, they do not need to be aware of the trust’s existence or agree to it for it to exist. The term “subject” would have been used in that case. There is a risk of the current, fashionable Americanism of attempting to reinvent a trust in a banking trust company context as a three way contract creeping in which should be left in the fog on the Grand Banks on the other side of the pond.
That has been insidiously making its way into offshore trust administration “agreements” between the settlor and the trustee, but has yet to involve beneficiaries.
My reference to Armitage v Nurse [1998] Ch 241was a reference to Millett LJ’s comment:
“I accept the submission made on behalf of Paula that there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts”.
I was therefore asking whether this would suggest that if a beneficiary was unaware of the trust’s existence he/she would not be in a position to seek to enforce his/her rights against the trustees and would thus not in fact possess any enforceable rights. If this is correct then, as per Millett LJ, there would be no trust.
Thanks to all those who replied. It is proving to be an interesting topic.
Essentially the client A and his wife B are looking to make a gift of his recently purchased residential home to his children and pay full market rent in consideration of his/their occupation which is expected to fall within each of C D and E’s personal allowances for income tax.
As C is a minor (not far off majority), and D and E are very young adults it was thought that for asset protection purposes it might be beneficial in all the circumstances to keep a lid on planning until circumstances dictated otherwise - e.g. once a beneficiary receives an income from elsewhere pushing his total income over the personal allowance, or once a beneficiary is seeking to buy a home and SDLT implications apply.
It was at least hoped that the income could be invested for each of them discreetly using ISA allowances etc. Given the facts, it seems that the parents would need to become transparent fairly quickly if they do indeed decide to proceed with such planning mindful of course of the risks of doing so.
Malcolm’s argument seems very odd. The lack of awareness on the part of a beneficiary of the existence of their rights may well make it difficult to enforce such rights in practical terms but it surely does not have the effect of extinguishing them altogether. Does he really expect a court to say to a beneficiary that it will only enforce rights of which the beneficiary has always been aware? Self-evidently it can only actually enforce a right at the request of someone who is currently aware that he may have it?
The Armitage case had nothing at all to do with beneficiaries’ awareness of their rights but with whether the rights they did in fact have were so extensive in quantity and quality to amount to rights under a trust enforceable by a court of equity. There was also a question of when time begins to run for a beneficiary whose rights are contingent or vest in the future. A discretionary object may never have time run against him: Lemos v Coutts (Cayman) Ltd [2006] 9 ITELR 616, a Cayman decision followed in Bermuda and regarded as the preferred view by the authors of Lewin. The trustees’ consequent exposure to the right of due administration by a discretionary object, of which there must always be at least one while the trust has assets, is described by Underhill as being “open-ended”.
If someone is so absent-minded or naive or contumacious as to declare a valid trust over an asset and put the document away with no one else knowing, the focus shifts to the asset. In law the declarer has disabled himself from dealing with the asset otherwise than as permitted by the trust he has declared. It will not thereafter pass under his will or intestacy to persons who or for interests which are almost certainly going to be different. If the document is never discovered no one can ever assert that successfully. But if it is discovered, say, 20 years after the death the trust beneficiaries will have a prima facie right of action to enforce it subject to limitation periods and the trust being otherwise valid. Whether such an assertion will be upheld by a court will depend on numerous factors but the beneficiaries’ previous lack of awareness of the existence of their rights will not be one of them save as regards limitation. In that context fraud, fraudulent breach of trust, deliberate concealment, or deliberate commission of breach of duty by the declarer may be critical: time may either not run at all or run only from discovery.
Not sure, Malcolm, what Armitage v Nurse [1984] would bring to HMRC’s supposed argument, which the way it is depicted borders on the fabulous assertion of a sham, to the extent that the beneficiaries were unaware of the trust. I may be missing your point.
The beneficiary of settled agricultural land in that case knew she was a beneficiary, she appears to have had no access to the trustees’ documentation. It was a question of whether and on what basis the pleadings were amendable at that stage to plead “fraud”:
“and that, accordingly, since without amendment the pleadings could not support a plea of fraud, clause 15 of the settlement operated to absolve the trustees from liability for the alleged breaches so long as they had not acted dishonestly; but that the plaintiff would be allowed to examine the trust documents and investigate the trustees’ management in order to re-amend her statement of claim.”
There was no question of the settled property remaining in the settlor’s estate by definition.
If the trust is constituted by delivery of the property to the trustees, it is constituted, even if it might be what is inaccurately termed a sham. The sham or fictional trust argument does little more than revise an apparent trust into a bare trust for the purposes of an insolvency or ancillary relief proceedings in any event and involves more than the beneficiaries simply being unaware.
The existence of an “object”, the beneficiaries, is all that is needed, they do not need to be aware of the trust’s existence or agree to it for it to exist. The term “subject” would have been used in that case. There is a risk of the current, fashionable Americanism of attempting to reinvent a trust in a banking trust company context as a three way contract creeping in which should be left in the fog on the Grand Banks on the other side of the pond.
That has been insidiously making its way into offshore trust administration “agreements” between the settlor and the trustee, but has yet to involve beneficiaries.
Siany - From next year all UK express trusts have to be registered unless they are excluded under Sch 3A of the 2017 Regs. A parting gift from the EU which did not, apparently, like trusts.
I do not disagree with the comments of both Peter and Jack above.
Perhaps I should have made no further comments after my post which said:
"So long as the so-called “three certainties” are satisfied the declaration of trust is valid. The trustees are under a duty to inform the beneficiary(ies) who are sui juris of the existence and terms of the trust Hawkesley v May [1956]; Brittlebank v Goodwin [1868].
I added “However, what I’m not sure about is whether if the beneficiary(ies) are not informed and are unaware of the trust’s existence whether a trust has in fact been created at all which, if not, would prima facie suggest that the property does remain in the donor’s estate [Armitage v Nurse [1998]]?” for discussion purposes a view which was quickly shot down by both Peter and Jack.
The reference to the Armitage case wasn’t because of what that case decided or was about but purely as a reference to Millett LJ’s comment about the “irreducible core” point.
Apologies to those reading this thread if my comments confused rather than clarified.
I have a situation at the moment where two brothers inherited their mother’s property and the property was registered in their joint names so no need to register.
Brother A is considering gifting half his share to his spouse ahead of the sale for CGT purposes under a Declaration of Trust.
Presumably if brother A does this then the DoT will need to be registered and then recorded as closed when the property sells and the proceeds paid away. Could this be avoided if the DoT also brings in his wife as a trustee? Also does Brother A’s actions mean that the joint ownership with his brother becomes registerable because the Trustees and beneficiaries will then differ?
I would have thought you have a single trust of land either way but yes, if the wife does not become a legal owner, the trust of land will need to be registered - the brothers would be the legal owners and therefore trustees - the three of them are the beneficial owners (50:25:25). I imagine registration might be ignored (a judicially breach?) if the property is sold before March 2022.