Is there any issue with preparing a trust deed which says the property will be placed into the trust at a future date. I guess the alternative would be to create a pilot trust in respect of £10. Is there any benefit to that?
We both commented on this at https://trustsdiscussionforum.co.uk/t/constitution-of-pilot-trusts/19807/1
A properly executed trust document is valid to create a trust but one which is incompletely constituted until the future date when some trust property is settled. Until then there is a right of beneficiaries to enforce it but it is inchoate until there is a trust fund to enforce it against.
That property can be settled by a transfer to the trustees or a DOT of it by the person who owns it.
Mr Kessler’s precedents define the trust fund as follows:
"1.5 “The Trust Fund” means:
1.5.1 property transferred to the Trustees to hold on the terms of this Trust; and
1.5.2 all property from time to time representing the above."
The draft does not contain a Schedule defining specifically any particular initial property in 1.5.1. So an £10 is not essential to such a trust. I would be suprised if Mr Kessler had nodded like Homer and offered a draft which would not be legally effective once property was later settled, by transfer or DOT, although nothing was settled at the date of execution. The £10 lark and pinning it to the trust deed is particularly antiquarian and obtuse when the settlement of property is actually or almost concurrent with execution.
It is my view that the commencement of such a settlement for s48A is when the property is later settled and not the date of execution.
Jack Harper
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My understanding is that any new pilot trust now needs to be registered under TRS (with the attendant cost of registration and maintaining registration), which could negate any other perceived benefit.
If the “future date” upon which the property is to be settled is not within the foreseeable future, the circumstances of the intending settlor and even those of the trustees and potential beneficiaries may have changed.
It would therefore seem sensible to my mind to defer creating the trust deed until closer to the date that it might be fully constituted by the transfer of the property to, or under the control of, the intended trustees.
If, say, £10 were to be settled now, the trust will be fully constituted. If that £10 was taken in charges the trust will terminate as it is “empty”. Would any further assets settled under the terms of that trust revive the trust or be settled on like terms, so that the date of commencement of the trust for tax purposes will be the date upon which the new asset was settled? I think this particular aspect was the subject of discussion on the Forum a couple of years ago and am not sure that any satisfactory conclusion was reached.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
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The Regs do not define “trust”. It is thus either a word of ordinary meaning or used in a technical sense per the law of trusts as part of its proper law. In my view the latter seems correct. A trust with no property is a trust and express.
Para 6 of Sch 3A is only engaged if the time of creation is apposite within 6(b). The exclusion is headed “Pilot trusts”. Although “Pilot” is not defined either, there is a value limit in 6(a). Does a “Pilot trust” mean one within para 6 or must it also be whatever that phrase generally connotes, either as ordinary English words or with a technical meaning. (It is not a trust settled by a Pilot as that would be a Pilot’s trust). If either is relevant it must be the latter but the law of trusts does not differentiate it as such; no doubt a lawyer can recognise one as they would an elephant. Unless 6(b) applies none of this nonsense matters.
A “trust” is not defined but a “trust…provider” is in Reg 12(2)(d)(i) shedding no light on the term save that it must have a trustee but can include a “similar legal arrangement”, an exotic creation which is not a trust at all but similar to one, but not within Para 6 (A Pilot legal arrangement similar to a trust is not excluded, whenever created). The term “trustee” of an express trust is not defined but must have a technical meaning, as does “trust” itself.
In my view a trust is created once the trust instrument or DOT is validly executed as the law requires. I cannot see much point in DOT of future property unless it contains the usual long form provisions of a deed to which a settlor and trustee(s) are parties, the execution of the latter usually being a valuable plus. It then becomes registrable on TRS even if it contains for the time being no trust property. There is no justification for reading into the Regs that a trust is not a trust if it is incompletely constituted, whether a lawyer would recognise it as a pilot trust or not.
The trust will be a trust that is not a taxable relevant trust (until HMG find a way of taxing a trust without assets). Reg 45ZA (6) does not refer to a registered trust being “closed” or “terminated” which are sensible colloquialisms for a change in any of the information previously provided to HMRC in the registration process. It is not clear to me how or when a trust without assets has “ended” per HMRC:
"Closing a trust
You’ll need to confirm that the details on the trust register are up to date and tell us the date the trust ended. Do not write to HMRC to tell us that the trust has come to an end"
Do the trustees have to retire? Can all the trustees retire given ss 39 and 37(1)(c) TA 1925? They cannot make an exhaustive appointment of a non-existent trust fund. No need to worry. HMRC, for it is they, will tell you if your trust has ended which is just as well as only they know, sed quaere.
Jack Harper
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If it is mentioned only in the recitals that it is intended/exepcted some specific (or non-specific) property will be added to the trust at a later date, then, in general terms, that seems mostly unproblematic. However, there is no trust of that “future property” in such a case and, therefore, unless there is something in the trust fund at the time of executing the trust deed, I cannot see any point in executing it as it will not create a trust at that time and it will not be possible to add property later to the “X Trust”, if the “X Trust” (purportedly established by that trust deed) does not exist as a trust - although it would depend on quite how you word the “addition”: perhaps saying that it is “to be held by A and B on the terms set out in a document dated …”, but in that case why execute that document many years before it is actually needed?).
On the other hand, if what you mean is that the the settlor (S) wishes to establish a trust (say, a discretionary trust for S’s descendants) and be certain that S’s property will be held on those trusts at a particular date in the future (which could be “10 years hence” or S’s date of death), so that S is not able to change the fact that the property will be held on those discretionary trusts at that date, then will that not establish a substantive trust over the property as at the date of the trust deed? Almost certainly not what S intends and it raises a number of questions such as: what if S wants to move house in the meantime (what is the status of any additional money required for this, or any surplus that arises)? Who pays for repairs, insurance, etc? Does S want to be able to revoke the arrangement? What happens is S loses capacity? And so on.
Paul Davidoff
New Quadrant
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The main objective would surely be to add property later and I see no basis on which such property could itself be impressed with the trusts of the document merely by virtue of its execution, however clear the designated property in question was in the minds of the settlor or the trustees. An addition of that could only be made by a separate DOT over the asset or a transfer of it to the trustees.
We are all familiar with a detailed trust contained in a document that is not intended to be fully operative for some, perhaps many, years ahead. It is called a Will. Pilot trusts are often created in lifetime with £10 or £100 for example to facilitate pension trustees in exercising their discretion to pay funds into a pre-existing trust so that they do not have to get involved in anything but that decision in principle and the payment. Such a trust might be created many years before such events could conceivably occur, such as death after retirement, if at all like death in service.
So my principal point is that it is not necessary for its intrinsic validity that a trust should have an initial trust fund and cause the necromancy of the bank note to be pinned to it. I have seen many occasions of that when the addition of funds was concurrent or took place within days. To me there is something wrong with lawyers repeating an action without understanding what it achieves because they have always done it.
There is an advantage in creating such a trust early. The detailed provisions of it can be discussed fully with and explained to the settlor and, if required, trustees and beneficiaries. The trustees by their execution will have accepted office and if later dead or unable or unwilling to act can be replaced by the rules of TA 1925. A person e.g. pension fund trustees can be certain that the trusts provisions are what the settlor wanted and are not what his descendants have cooked up. The settlor can be assured that if in future “his” pension funds, legally subject to the fund’s trustees’ discretion, can be paid into the trust he has set up with advice in accordance with his non-binding wishes as expressed to those fund trustees.
The affixation of a banknote is as anachronistic and formulistic as feoffing in fields or a writ of assumpsit.
Jack Harper
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Thank you everybody for the very useful comments. My view is a trust with no property is not a trust as there is no certainty of subject matter. It may be an inchoate trust, but, in my view, an inchoate trust is by definition not a trust. Paul’s point regarding the impossibility of adding property to ‘X Trust’ is an interesting one. Whilst I think that is true on a strict literal interpretation of the words. I think a court would likely give the provision a purposive interpretation and treat those words as meaning a transfer to be held on the terms of this trust deed. Nonetheless, sensible wording gets around the possible problem and that was also Paul’s suggestion.
So as your view is that a fully executed trust deed without trust property yet added (incompletely constituted as legal academics would describe it) you would say that it need not be registered on TRS?
Jack Harper
Hi Jack,
Yes, that is my view. I don’t consider that to be an express trust. Whilst a trust deed creates a trust it only does so, in my view, once the trust is constituted. A trust with no trust property is not constituted.
In support of that I refer to regulation 45(5)(c) of the MLR, which refers to the fact that the trustees must provide, ‘a statement of accounts for the trust, describing the trust assets and identifying the value of each category of the trust assets at the date on which the information is first provided to the Commissioners (including the address of any property held by the trust’. It would be odd to require people to file a statement of account describing the trust assets in a situation where the trust has no assets.
I also refer to the exception in Schedule 3A of the MLR (Amendment) Regulations 2020, which makes an exception for pilot trusts created before 6 October 2020. A pilot trust is ‘a trust which holds property with a value not exceeding £100’. On a literal interpretation, that would mean a trust with no property created before 6 October 2020 would need to be registered, which in my view would be an odd conclusion because I can see no good reason why a trust holding property of less than £100 should be excluded but a trust holding no property should not.
Yours the Legal Beagle
1 Reg 45(5)(c) applies only to a TAXABLE relevant trust. A trust with no assets is not taxable, yet (Rachel Reeves may have plans for such a trust)
2 A trust which holds no property does not hold property of a value exceeding £100. This provision excludes certain trusts. It does not define what trusts must register. For example HMRC hold the view that a trust with no property is registrable even if, as they put it, it has “ceased”.
TRSM40010: “Registrable non-taxable express trusts that were in existence on or after 6 October 2020 must register within 90 days of becoming registerable (sic), or on or before 1 September 2022 (whichever is later).This includes trusts that were in existence on or after 6 October 2020 but have since ceased. Trustees should register such trusts on TRS with the required information and then are able to immediately close the trust record to record the fact that the trust has ceased.”
An incompletely constituted trust is a trust and is not devoid of legal significance.
Jack Harper
Dear Jack,
Thank you for drawing my attention to the fact that regulation 45(5)(c) only applies to taxable relevant trusts. Nonetheless, I stand by my opinion. For a trust to be valid it has to satisfy the three certainties and it has to be constituted. Regarding constitution, Milroy v Lord and the various other cases in which failure to constitute the trust establish that where a trust has not been constituted, there is no trust at all, of course subject to the exception in Re Rose. I rely on Knight v Knight (1840) 49 ER 58 in support of the claim that no trust exists if the three certainties are not met.
I also rely on the normal meaning of the word inchoate, which is the word you yourself have used to describe what, if anything is created, when a trust deed is executed but no property is transferred to the trustees. In criminal law, an inchoate offence is an offence that has not, or has not yet, been committed; for example, attempted murder is not murder. Likewise, an inchoate trust is not a trust.
Furthermore, I rely on the fact that a trust has to satisfy the three certainties, and I do not consider that a trust with no property can satisfy certainty of subject matter. However, one could argue that, if the property to be placed in trust has been defined, then certainty of subject matter is met. If a purported trust does not meet the three certainties, then there is no trust.
Regarding your reference to the HMRC guidance, the guidance applies to trusts that did have property on the date when they became required to register but which no longer have property. In my view, the guidance is not relevant to the situation where a trust never had property to begin with.
It may be that we cannot agree on this one. However, I am always open to changing my mind.
One point that does interest me is where in the MLR 2017 can I find the requirement for a trustee of an express trust that is not taxable to register the trust. I see a reference to need for the Commissioners to keep records of the beneficial ownership of such trusts but that is not the same as an obligation on the trustees to register. Please note I am not saying there is no such obligation. I am merely asking where I can find it.
Yours the Legal Beagle
You are right to question what essential authority HMRC has to require the registration of non-taxable trusts.
HMRC are quite prepared to ignore or stretch the powers conferred on them by law. They have no authority to register estates under the 2017 regs and their other role as taxation authority does not give it to them. They can of course accept as that authority that they will no longer require a Form 41G if a trust is registered.
The authority for registering a non-taxable trust is there but I agree it is scarcely obvious. Regs 42 and 44 apply to all relevant trusts. But Reg 45 is apparently only concerned with taxable trusts. Reg 45(1) obliges HMRC to maintain a register of such trusts but 45(10) (c) requires that register to contain details of non-taxable trusts.
I have no idea why the corresponding obligation to do so was not contained in Reg45ZA itself or by amendment to 45(1). The original 45(10) only applied to taxable trusts. The new version was substituted by the 2020 Regs at the same time as Reg45ZA was itself added. I think the obligation to keep a register of non-taxable trusts is implied by current Reg 45 but it is an unsatisfactory link.
The register can only contain the information in Reg45ZA(3) and (4). The former does include details of an individual (but not any other person) referred to in a letter of wishes as a potential beneficiary. I have corrected what I first said athttps://trustsdiscussionforum.co.uk/t/trs-and-letter-of-wishes/20016/2
Jack Harper
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