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A.  Introduction

1. The British legal trust has by some been regarded as one of the finest ideas of the British legal mind.  Although others living with some trusts may well take a different view but where our legal system went during Empire so did the trust.

2. Both the Ancient Greeks and then the Roman’s using the “usufruct” developed similar ideas although legend has it our trust law started with the Crusaders.  Knights went to the Holyland leaving women and children behind.  Those who in law needed protection.  So the “cesti qui trust” was formed.

3. But apart from protecting beneficiaries sometimes from themselves, the trust has also been a place to protect assets themselves, sometimes from the beneficiaries although sometimes from tax.  As Lord Tomlin said “every man is entitled if he can order his affairs so that the tax attaching under the appropriate Act is less than it otherwise would be.  If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxman may be of his ingenuity, he cannot be compelled to pay an increased tax” [IRC v. Duke of Westminster 1939 A.C.1.].

4. But when considering this point the Inheritance Tax Avoidance Schemes Reg. 2017 (SI 1172/2017) (“DOTAS”) came in to force on the 1 April 2018 and have to be respected.

B.  Tax

5. The early tax issues with trusts was initially more to do with whether the Church should be the beneficiary over the Crown on death.  That was the reason behind The Statute of Uses of 1535 in which trusts were for a time outlawed although Lawyers found their path around the restrictions long before The Finance Act 1894.  Under the 84 Act when a landowner died he became able to pass his estate to his heir.

6. For our purposes trusts their use and their taxation moved on over the centuries until the current regime which became law on and from the 22 March 2006.

7. From 2 March 2006 the inheritance tax treatment of trusts changed radically.  All trusts then fell either under the Relevant Property Regime (“RPR”) or under the previous rule for Interest In Possession (“IIP”) trusts.  Since then an RPR trust is never taxed as part of someone’s estate although it will attract an IHT charge of 6% every ten years.  If the old IIP rules apply there will be a tax at the death rate for those assets treated as falling within the estate of the tenant for life.

8. Further, since 2 March 2006 five types of trust will generally be treated as IIP trusts under the old regime:-
(i) Life Interest trusts under Section 49 of the IHT Act 1984 meaning that a life interest was existing before 22 March 2006
(ii) Disabled Persons Trusts under Section 49A IHT 1984.
(iii) Trusts where there is a life interest on a death under Section 49D IHT Act 1984
(iv) Trusts where there is a life interest to a spouse after the death of that persons spouse (sometimes called a Transitional Serial Interests) where the death is after the 5 April 2008 under Section 49D IHT Act 1984 and
(v) By Sections 71A and B IHT 1984 as a bereaved minors trust.

9. The practical effect of these changes is that:
(a) for those trusts falling or likely to fall under the IIP regime the Revenue will consider assets in the trust to fall as part of the life tenants estate.  So for many it should trigger a tax review on disposals or look at potential reliefs long before the life tenant’s death
(b) for those falling under RPR there will be a 10 year charge to the Revenue (currently 6%) so there should be a review a good year before the 10th anniversary.  Common would be a decision to distribute trust property before the anniversary.  Although some might calculate the 6% tax is fair better than might otherwise fall due under a different tax regime

10. For a period of time during the 1990’s a creation of a Pilot Trust was common and often wise (see below).  The Revenue recognised that these were often used as a way of avoiding or reducing inheritance tax (IHT) and so introduced the “Same Day Rule” (see below).

C.  The Meaning of the Legal Trust

11. Britain’s membership of the European Union caused British trust law a little difficulty.   In the United Kingdom our law of trusts recognised that a third party could hold assets for beneficiaries.  The UK was not the only nation but the Napoleonic Code common in Europe has different rules.  This led to the Hague Convention on the law applicable to trusts and in our local law the Recognition of Trusts Act 1987 through which a trust can now be described as:
“For the purposes of this Convention the term “trust” refers to the legal relationship created inter vivos or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.  A Trust has the following characteristics:
(a) The assets constitute a separate fund and are not part of the trustees own estate;
(b) Title to the trust assets stands in the names of the trustees or in the name of another person on behalf of a trustee;
(c) the trustee has the power and the duty in respect of which he is accountable to manage, employ or dispose of the assets in accordance with the terms of the Trust and the special duties imposed upon him by law;

The reservation by the settlor of certain rights and powers and the fact that the trustee may himself have rights as a beneficiary are not necessarily inconsistent with the existence of a trust”.

12. In determining whether there is a trust, for centuries the Court of Equity (Chancery) has looked for three certainties.  These are:
(i) Certainty of Intention [re Kayford Ltd 1975 1WLR].
(ii) Certainty of Subject Matter [Hemmens v. Wilson Brown  (a firm)] and
(iii) Certainty of Object [re Coxens 1913].
13. Most trusts are then divided between:
(a) private and
(b) public trusts.
This paper is focused only on private trusts.

D.  Different Types of Private Trust

14. Many trusts will be carefully thought out by their maker and will be Express Trusts and in writing.  The most common being discretionary trusts or the pilot trust but others can simply arise by the operation of law, such as an implied or constructive or resulting trust.

15. To summarise in short some of the other names and types are:
(i) “Bare Trust”.
This is where A creates a trust and appoints B as trustee for the benefit of C.  The trustee has no active duties to perform but just holds the property [Saunders v. Vautier 1841 and Vanderwell v. IRC 1867 2AC 291] (see below).
(ii) “Completed or Incompleted Trusts
More about the position of a trust rather than its type.  A completed trust can be one prepared by a settlor in a trust document or a trustee in a Will trust.  It is complete.  The incomplete trust indicates something else needs to be done.
(iii) The Constructive Trust
The Constructive Trust will usually be a long way from the Will draftsman’s life.  They have been around for centuries [see Keech v. Sandford 1726].  Regularly imposed by the Courts to protect beneficiaries from unreasonable conduct.  Then in the hands of law Lords like Diplock and Denning in cases like Gissing v. Gissing [1971] AC 886 to defend and protect.
(iv) The Disability Trust
Under Section 18 of the IHT Act 1984.  In many ways a discretionary trust for a disabled beneficiary.
(v) Discretionary Trusts
Where the trustees have a duty to select from a number of beneficiaries those who are to receive sometimes also the amount of the fund is either income or capital of the trust [see Warner J in Mettoy Pension Trust Ltd v. Evans [1991] 2 AER 513 and The House of Lords in McPhail v. Doulton [1971] AC 424.  Discretionary Trusts fell out of popularity following the changes in the nil rate band.  However,  the under two year trust (see below) has a potential place (see below).
(vi) Executed or Executory Trusts
Similar to completed or incomplete trusts.  Executed trust is a trust where the trustees are all in place and properly appointed.  The assets are all legally in the trust.
(vii) Express Trusts
A fully set up trust with a settlor, appointed trustees, identified beneficiaries and assets.
(viii) Fixed Trusts
Where the trust is fully formed and the beneficiaries are known as is their entitlement.  So much so that if the assets are not transferred to the beneficiaries  they could enforce it by an application to the Court.
(ix) Implied Trusts (or similar to the Resulting Trust if not the same)
A Lawyers way of describing a trust which arose by operation of law.
(x) Maintenance Trusts
Not a lot to be found but set up for tax purposes for the specific purpose of maintaining a historic house, monument or church.
(xi) The Pilot Trust
For a period of time between the 1980’s and 1990’s the Pilot Trust was a popular device to save tax.  For this in operation see Reynaud v. IRC [1990] STC (SCD) 185.  The use of the word and how they can apply is that the Pilot Trust is formed and signed before the Will.  It always had to be.  Usually formed with a small payment or transfer into the trust but in the knowledge that at a later stage larger funds would be invested in the trust either just before or through a provision in a Will.  They still have a purpose and need but the Revenue recognising the device was being used as a tax escape introduced the “Same Day Rule” by which inheritance tax would be charged as if the trust was created on the same day as the Will and the death.
(xii) The Simple Trust
Simply another name for a Bare Trust.

(xiii) Special Trusts
A property is transferred to trustees to administer and pay income to the tenant for life after his/her death under the wording of the trust it becomes a Bare Trust when it transferred to the next person.

E.  A Trustees Powers

16. There has over the decades been a constant balancing act and/or review of trustee’s powers against obligations since the otherwise impressive consolidation act The Trustee Act of 1925.

17. This has led us through the Trustee Investment Act of 1961, Trusts of Land and Appointment of New Trustees Act of 1996, the Trustees Act of 1999, the Trustee Act of 2000 to the Inheritance and Trustees Powers of 2014 amongst others.  The 2014 Act making rules under the Inheritance (Provision for Family and Dependents) Act 1975 and extended trustees powers previously only available by adopting Sections 31 and 32 of the old Trustee Act 1925 (for maintenance and capital).

18. A popular misconception is that a trust can last forever but not quite.  Trusts can only exist for a time.  The journey was started by the Accumulation Act of 1801, the consolidation made by the Law of Property Act and the Trustee Acts of 1925, the Perpetuities and Accumulations Act of 1964, then on the 12 November 2009 the Perpetuities and Accumulations Act of 2009.

19. In summary the effect is that the trustees are usually allowed twenty powers being:
(1) a power to invest the Trust Fund, make investments, change investments;
(2) a power to invest in land which after decades can  now include leaseholds which were once regarded as (a) a wasting asset or (b) until 1925 had only limited protection by the Chancery Court;
(3) a power to invest in Government Bonds with;
(4) a similar power (unless the appointment prevents this) to sell;
(5) the power to mortgage;
(6) and to insure assets;
(7) deposit funds in to banks or building society deposit accounts;
(8) employ agents and experts to help;
(9) settle claims;
(10) seek guidance and declarations from the Court;
(11) limited powers to advance income for under age or ill beneficiaries in their minority or;
(12) to accumulate income often in the minority of the beneficiary;
(13) or advance capital to beneficiaries;
(14) or to mortgage to buy land for the trust;
(15) or lease;
(16) or carry on a deceased’s business;
(17) to sell at Auction;
(18) to give valid receipts for disposals;
(19) to agree with Creditors (usually to settle the debts of the deceased) and
(20) to appoint others in their place or increase the numbers.

F.  The Trustees Duties

20. We have all read a book or seen a fil in which the terrible trustee has taken advantage of the trust beneficiary for his own benefit.  The Court of Chancery has existed for centuries to stop such things happening but it involves an application to it.  The legislation mentioned above contains restrictions particularly The Trustee Act of 2000 which tends to change the level of the bar of trustees duties from whether they are professional trustees or members of the family or friends.  As a factual example of the duty of professionals (in that case Sections 107 and 113 of the IHT Act of 1984 (see Swain Mason v. Mills Reeve (a firm) [2012] EWCA Civ 498.

21. However, in short the trustees must:
(i) act in good faith and honestly;
(ii) exercise reasonable skill and care in dealing with the trust work (the bar here varies with professionals expecting to proceed with greater  skill) (that is usually why they are appointed) than a lay trustee;
(iii) comply with the terms of the trust;
(iv) take reasonable care to protect the trust assets or property;
(v) subject to all that is contained in the trust deed to act impartially between individual beneficiaries;
(vi) to act exclusively in the best interests of the Trust avoiding conflicts of interest;
(vii) save where allowed, to charge for your duties under the Trust Deed or Will creating the trust not profit from the trust.  This usually means you cannot buy trust assets.
(viii) invest where allowed properly;
(ix) keep records of what was done and why;
(x) unless allowed by the Trust, act personally as trustee;
(xi) this does mean dealing with investments of funds, the investments must be prudent depending on the needs of the beneficiaries, object of the trust but it does not mean a trustee can simply follow what the appointed IFA thinks is wise, which means;
(xii) trustees have a duty to pay and where they can in accordance with the trust the income for the chosen beneficiaries, eventually
(xiii) to pay out to those correctly identified as the beneficiaries to bring the trust to its natural end.

G. The Bare Trust

22. Many clients or their families have experienced unhappy or expensive difficulties with a trust of one sort or another.  As a result they do not wish to contemplate them in any form but with some advisors the Bare Trust has become a wise step.

23. I have a separate article on Trusts which contains more detail.  However, a Bare Trust is by its name one where usually there is a single beneficiary which has the right directly or on application for an immediate and absolute title to the assets in the Trust both income and capital.   The Trustees has some duties because he/she is a fiduciary and that includes a restriction on “self-dealing” but they can and are used where a chosen beneficiary falls under the age of majority.

24. With such a Trust there are both advantages and disadvantages.   This work is not intended to be a detailed explanation but simply to mention their operation.  In summary:
(a) Income Tax
Generally the income from the Trust will be treated as that of the beneficiary/child (see ITTOIA 2005 Section 620).  Although HMRC will consider the minor beneficiary to be a Settlor for income tax.  The effect, therefore, is that HMRC will not allow deductions for Trust management expenses.
(b) Capital Gains Tax
As most child/beneficiaries of a Bare Trust will have little actual income themselves, if there is CGT it is likely to be taxed at the rate of 10% rather than 20% which applies to Trust gains.  However, CGT will become payable if assets have increased in value by more than the annual exemption.
(c) IHT
Which is the main purpose of this work.  Section 43 (2) (a) and settlement needs to be read in conjunction with the Trustee Act 1925 Section 31.  In most cases using the Bare Trust the gift to the beneficiary will be regarded as a straight gift of property and so a PET.  Therefore, not (as HMRC’s position currently stands) a settlement for IHT purposes.

25. For the Trustee fortunately is not required to register as there is no current tax liability for Bare Trusts just because any tax liability will the beneficiaries.

26. Some writers suggest the Bare Trust may be an inappropriate method of dealing with substantial property assets which the intended Donor wishes to make a gift to grandchildren but avoid a relevant property settlement.

H. The Two Year Discretionary Trust

27. Some clients often for understandable reasons are at the time of needing to make their Wills unable which of their potential beneficiaries should benefit on their deaths.  Many people will be aware of the “discretionary trust” created in different tax times where a property was over the nil rate band.  In these circumstances a discretionary trust provided it is resolved within two years of death may work but the warnings given in the case of Harris (P.D.R. of MacDonald dec’d) v. RCC [2018] UK FTT 204 “it is no defence to any IHT determination … that .. may have transferred the assets of the estate to a beneficiary on the basis that the beneficiary would be responsible for payment of the IHT due.  Nor is it a defence that … was ignorant of his obligations, as a personal representative, to pay the inheritance tax …”


28. The Inheritance Tax Avoidance Schemes (Prescribed Description of Arrangements) Reg. 2017 (SI 1172/2017) became law 1 April 2018.  There is a Revenue Guidance on the internet.
29. The Regulations affect what is called “Tax Advantage” schemes and that means in relation to IHT and these are ones which in the eyes of the Revenue are contrived or abnormal thereby producing the tax advantage.
30. That tax advantage is not any IHT advantage but limited to avoidance or reduction of a relevant property entry charge, reducing the 10% or interim exit charges or producing a person’s estate which does not give rise to a PET or similar.
31. But there is an “established practice” exemption which means that some arrangements should be disclosed to the Revenue.  Effectively these are arrangements which have established practice and/or HMRC have indicated are acceptable.  As a result DOTAS will not hurt those long established retail planning products whose workings are well understood in the retirement industry.  As a result for some schemes for clients we are moving back to “clearance” when trying something unusual specifically to save tax.

J.  Warning

32. For some the legal trust is an expensive nightmare.  For others it remains (if only for a decade) a sensible and useful device.  Many old Lawyers and Accountants still take the view that if in doubt put assets in a trust.  But every case is different as are the circumstances.  This work is no alternative to personal advice and assistance nor is it intended to be.  If we can help please call David Hassall on 01548 854878 or email him at david.hassall@hassall.law

Hassall Law Limited
6 Fore Street
Devon TQ7 1NY

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