It’s a trust – But not as we know it!

Mark McLaughlin looks at a case involving a trust where none of the normal formalities were undertaken, which almost resulted in a large tax bill.

Some individuals might assume that the creation of a trust necessarily involves a written document (commonly a ‘trust deed’ in England and Wales), which appoints the trustees, states the terms of the trust, and identifies the beneficiaries and the trust property that will be subject to the trust.

However, it is well established (under English law) that a trust does not need to be in writing; it may be made orally. Trusts without formal documentation are relatively uncommon but are sometimes used, such as in the form of a bare trust. 

A ‘bare’ (or ‘simple’) trust is one in which the beneficiary has an absolute right to both income and capital of the trust. Assets in a bare trust are held in the name of a trustee(s) as nominee; the beneficiary has the right to the trust capital and income if (s)he has legal capacity (e.g. is not an infant).

In some cases, the fact that no formal trust documentation exists can cause difficulties, such as in terms of establishing that the bare trustee is not liable to tax on income generated from a trust asset. 

For example, in Tang v Revenue and Customs [2019] UKUT 0081 (TC), HM Revenue and Customs (HMRC) opened an enquiry into the appellant’s tax position, based on information received that she had over $900,000 in an account in her name at a bank in Singapore. The appellant asserted that the funds were held by her as bare trustee for family members (i.e. her parents-in-law) resident in Hong Kong, so she had no tax liability in respect of it. HMRC issued discovery assessments for the tax years 2008/09 to 2015/16 on income and gains arising on the account and charged penalties for a deliberate failure to notify liability to tax for those years.

There was no trust document. HMRC’s view was apparently that no trust therefore existed. However, the First-tier Tribunal reviewed the evidence to see if it was consistent with the existence of a bare trust. There was no evidence that the appellant made withdrawals from the accounts. The appellant’s and her husband’s circumstances appeared to be quite modest. They lived in a house they purchased in 1998 for £73,000 with the help of a mortgage. 

The tribunal attached substantial weight to a statement made by the appellant’s parents-in-law that the funds were (and always had been) beneficially owned by them. The tribunal concluded (on the balance of probabilities) that the appellant held the funds in the bank accounts as trustee only on bare trust for her parents-in-law throughout the period in question. The appellant’s appeal was allowed.

The disposal of an interest in land generally needs to be conveyed in writing, subject to certain exceptions (see LPA 1925, s 53).

In any event, evidence of the trust’s existence is generally important. HMRC guidance (in its Trusts, Settlements and Estates manual at TSEM9520) includes sample wording for a declaration of a bare trust, which HMRC states will ‘usually’ be acceptable.