Apologies for another TRS related question but can i gauge how people are dealing with the property trusts that arise as in the example of Bob and Alice in the TRS manual at TRSM23020.
We have a difference of opinion on who should be shown as the beneficiaries. One view is that the beneficiaries of the property trust should be recorded as Bob and The Exors/Trustees of Alice’s estate. The other view is that it should be Bob and the beneficiaries of Alice’s Will on a look through basis as that is what the example is saying of Clara had been appointed instead of David
What if Bob and Alice weren’t married and were just friends who happened to invest in a property together. Would Bob be expected to find out who the beneficiaries of Alice’s will are?
This highlights a fundamental problem of definitions in the Regs. Reg 6(1) defines “beneficial owner” in relation to a trust to mean (i.e. not to “include” so exhaustively) the settlor, the trustees, the beneficiaries, a class of persons, or an individual (so not a legal entity) with control. The problem is that these terms are not further defined so the general law applies. I suggest that as the provision is directed at trusts, to which a recognised body of law applies, the first 3 terms have their technical meaning under that law whereas individual and person are ordinary words. (I return to the “class” issue later).
An allied problem is that there is no pecking order. So in Reg 45ZA (3) all of the above are beneficial owners either as individuals, member of a class or a legal entity. Now to para 9 Schedule 3A which requires the trustees and the beneficiaries to be the same persons. These are not defined terms but “beneficiaries” here surely cannot mean “beneficial owners” and in my view both terms must be given their trust law technical meaning. Although a trustee can also be a beneficiary here you must identify the trustees qua trustees. A trust can be a beneficiary of another trust but it is not a legal entity (unless a corporate) nor an individual nor a class of persons. However that does not seem to matter because if a trust is a beneficiary it is not also a trustee so the exclusion is not in point.
I disagree with TRSM 23020 Bob and Alice example only in that I do not accept that appointing Clara as second trustee attracts the exemption. Bob and Clara are then trustees of the property but Alice’s former share of the property is held on trust during Bob’s life and whoever are the trustees of the life interest trust they cannot properly be described as “beneficiaries” in that capacity. Though they may happen to be beneficiaries of the separate life interest trust. I do not believe it is supportable to look through the life interest trust and ignore the trustees by treating the beneficiaries of that trust as beneficiaries of the property trust even where both such beneficiaries happen to be the actual trustees of it in a separate capacity.
Realpolitik suggests that reliance on the exclusion is only prudent if the Manual explicitly and precisely covers a given situation (and cross fingers HMRC don’t argue later that it is wrong and does not state the law correctly or is too ambiguous to be relied on). Even then the trust is registrable in the example until Clara is appointed and there is no lawful deregistration procedure because of the change and no facility or duty to ask whether a person has any given status (compare the PSC and new ROE registers). Apparently either no one thought about the possibility or, if they did, they thought no further beyond the updating notification of the change: sub-reg (6).
Reg 6(1) (d) applies to make a beneficial owner “the class of persons in whose interest the trust is set up or operates” where “the individuals (or some of the individuals) benefiting from the trust have not yet been determined”. “Benefiting from the trust” and “set up” and “main interest” are not defined. So if the class of “persons” includes a legal entity the entire class is a beneficial owner even if only the “individuals” in it have not been determined but if the entire class comprises one or more legal entities still undetermined it is not. Simples!
A follow on from this if I may. Leaving aside if the example is correct or not,
What about contingent beneficiaries, are these included or not when considering if a co-ownership trust is exempt?
For example grandchildren would get Clara’s share if Clara did not survive Alice. Would this mean registerable even if Clara a trustee?
And vested interests? I assume if it is a vested interest then as it is an event that will happen (eg death of life beneficiary) they would have to be considered?
Or do we care? If someone is a potential beneficiary they are a beneficiary we have to take them into account? Old HMRC guidance on the original TRS registration suggests their view is anyone stated in the deed is to be considered a beneficiary.
The problem of applying the exclusion is that trustee and beneficiary are not defined. Assuming these words are to be given their trust law meaning a trustee is probably uncontroversial (a person in whom the legal title to the property is vested) but a beneficiary is another matter. A beneficiary is a person who has an equitable interest in the property but what kind of such an interest suffices? Is a person who holds the equitable interest on trust a beneficiary? And does it matter whether that person is a legal entity or not? Probably you can ignore a putative beneficiary who is only a discretionary object or member of a class as it is established that such a person does not have an “interest”.
The possibilities are limited by the identity of the trustees. For the exclusion to apply it must be the case that all such persons, and only they, also together own the entire equitable interest. If those interests are vested and absolute the test can be readily applied but if as you say their interests are held under a trust there is more doubt. Such a trust could be a bare trust for absolute owners or a trust for a variety of fixed but not discretionary interests.
TLTA 1996 s22 defines “beneficiary” to include a trustee but to exclude a trustee where the beneficiary is required to be “beneficially entitled” (and specifically excludes an annuitant). Under s12 (right to occupy) they must additionally be entitled to “an interest in possession” (not defined!). S22 applies to trusts of land and it would both be odd if the TRS exclusion did not accommodate trusts of land and also trusts of other property and did not differentiate in its application to both save only so far as justified by the inherent nature of the subject matter.
My own preference is that the exclusion does not treat the beneficiaries of a trust (whether the trustee is a corporate body or not) which owns the equitable interest as “beneficiaries” but an exception might be justified for a bare trustee (of any type) holding for absolute beneficial owners. So the exclusion would apply if A and B held for themselves as joint tenants or tenants in common or for C holding for them absolutely on a bare trust but not if C held as trustee for A for life remainder to B or whatever other the trust limitations were, vested, contingent, or subject to defeasance.
In terms of a prudent approach it is surely better to err on the side of the exclusion applying only where the trustees are also the only beneficiaries who together own absolutely the entire equitable interest. The acid test is what would a hypothetical judge decide applying a purposive/contextual construction to the plain words. The decision might be that it was aimed at the the sole classical example of joint tenants at law holding the legal title for only themselves in equity (though I see no justification for importing any further requirement about the size of their shares or distinguishing between a tenancy in common or joint tenancy in equity). In short, anything other than the plain vanilla version entails a risk of wrongful failure to register on the part of anyone who resolves a more elaborate set of facts as coming within the exclusion. Unless a bankable assurance is obtained from HMRC with full disclosure of those facts.
No-one can doubt Jack’s rigorous analysis above. I am unable to provide so rigorous analysis but tend to disagree with Jack’s comments re the appointment of Clara and its consequences made in respond to Nigel’s original post.
Exclusion from registration re co-ownership trusts requires that trustees and beneficiaries are identical. I agree with Jack that prima facie the term “beneficiaries” used in para 9 Sch 3A does not extend the definition to
“beneficial owners”.
Initially the property trust is exempt as trustees/beneficiaries are the same, namely, A and B.
On A’s death under her will a will trust is created with David (D), A’s son, appointed as trustee who is also appointed as A’s trustee replacement of the property trust.
Beneficiaries of the will trust are B (who possess a life interest in A’s property share) and Clara (C) as remainder beneficiary. B and C are equitable owners of the will trust property and thus beneficiaries of that trust.
But who are the beneficiaries of the property trust ie who possesses equitable ownership of the property trust’s property? I would suggest that they are B and C. If so, then the trust no longer satisfies para 9 Sch 3A as beneficiaries are B and C but trustees B and D.
If A’s will had appointed C rather than D as trustee of the property trust the trustees of the property trust would then be B and C with the beneficiaries remaining B and C and thus the appointment of C would result in ongoing exemption from registration.
I have less of a problem than Jack to look through the life interest trust. If look through is not correct then who are the beneficiaries of the property trust with B and C as trustee? Surely, not the will trust’s trustees ie C. Would such trustees (ie C) possess the equitable interest in the property trust?
I hesitate to disagree with Jack who recently (re another post) received the accolade of JK confirming that he agreed with Jack (and indeed another serious TDF poster, Paul).
Malcom - I have been “looking through” the wills/deeds when registering co-ownership trusts. But Jack’s comments made for interesting reading and food for thought.
I note that the TRS allows a trust to be included as a beneficiary. It has occurred to me that the will trust could be named as the beneficiary on the TRS instead of Clara as the TRS allows this.
In fact I did register an estate trust (ongoing over 2 years) showing a will trust as a beneficiary. As it did not seem right to me to show the named beneficiary of the discretionary trust, arising from the will, as a beneficiary.
In the HMRC example you refer to (for a co-ownership trust) I would show the beneficiaries as B and C.
Even if the will trust itself could properly be described as a “beneficiary”, which in the absence of a definition seems to me distinctly arguable, it cannot itself also be a trustee so the mismatch is not cured. If all the property trustees are also the only trustees of the will trust you may have a result. After all the will trust could be a secret trust, or even half secret. Surely there should be no distinction just because the trust limitations are either totally unknown or known only to exist. I fear the angels are dancing away on a pinhead!