Gift of settlor's interest in property to trust - or not?

Dear forum members

Please let me know what you think to the following scenario:

A creates a lifetime trust (settlor-interested and with a ‘dodgy’ will writing company - there is absolutely no reason for her to have done it). She dies a couple of years later. Under the terms of the trust, the Trust Fund is itemised in the usual way in a Schedule which simply states the address of a property. The property is leasehold and has a mortgage against it. The mortgage provider has not been informed. A standard form A restriction has been placed against the title. No advice has been given about the mortgage and no SDLT has been paid. The will writing company also prepared a will which leaves the deceased’s estate to the trust.

I have a couple of questions which are worrying me:

  1. Is the description of the property in the schedule to the trust sufficient to be interpreted as a gift of the settlor’s leasehold interest in the property or is it sufficiently vague that the trust hasn’t actually been constituted? Would the answer be different if the settlor had owned the freehold?

  2. If there has been a gift of the settlor’s interest in the property, without any express declaration of trust to the contrary, did the trustees become liable for the mortgage (albeit in contravention of the terms of the mortgage), so should SDLT have been paid?

Your help would be very much appreciated.

Lorna Sansom
Blandy & Blandy LLP

If the mortgage company has not been informed, I presume the deceased continued to pay the mortgage from her personal resources and the charge remains in place? That would imply that the liability to pay the mortgage has not moved, and still rests with the deceased’s executors?

Putting to one side the potential breaches of the mortgage terms, the only way I can see of interpreting it is as a transfer of the property subject to the ongoing charge, i.e. gratuitous transfer of the net equity in the leasehold property to the trust, on which no SDLT is payable? I appreciate that’s not what the transfer to trust claimed to do, but I struggle to see how else it could be interpreted.

Stuart Maggs
Howes Percival LLP

Doesn’t the answer depend on who the trustees are? Unless the settlor was a (sole) trustee or the deed includes a declaration of trust by the settlor it is hard to see how the trust can have been constituted, because that would normally require the property to be transferred to the trustees. There is some conflicting legal authority on the situation if the settlor was one of the trustees, with others.

Paul Davies
Clarke Willmott LLP

Thank you Paul. In this case, the settlor is a trustee with others but the trust document does not contain any express declaration of trust over the property. My own initial feeling was that, in the absence of an express declaration of trust or the legal title to the property being transferred, the trust had not been constituted. Put another way, I guess my concern is whether the inclusion of the property in the schedule to the trust deed can be interpreted in some way as a declaration of trust by the settlor.

Lorna Sansom
Blandy & Blandy LLP

Lorna, you may be right, however on similar facts the Privy Council decided a charitable trust had in fact been constituted in T Choithram International SA v Pagarani [2001] 2 All ER 492 (reversing the decisions of the courts below!).

Paul Davies
Clarke Willmott LLP