Shall I compare thee to…a trust?


Author: Helena Luckhurst, Teresa Cullen


This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

Novelty is usually a quality to be applauded but not necessarily in the law. When drafting documents, the temptation is to follow the tried and tested route. I was reminded of this recently when I was asked to clarify what type of trust had been created by a will containing the phrase ‘To my trustees on trust for my spouse absolutely’. That magic word ‘trust’ had been used and there was reference to trustees. Surely a trust had been created?

Well yes, a bare trust at most. However, bare trusts are akin to nominee arrangements. Being over 18 and there being no other condition attached to the gift, the spouse could have insisted that the trustees hand over the trust assets immediately. So although the word ‘trust’ was used, the arrangement would not be regarded as a trust by the average person with some knowledge of trusts (if you can find one).

However, if this absolute gift to spouse had been made subject to a power of appointment exercisable by the trustees, then that creates a substantive trust – most likely a life interest trust.

The recent case of Wagstaff and another v HMRC [2014] UKFTT 043 (TC) is a reminder that a trust can be found to exist even if the word ‘trust’ is not actually used. Mrs Wagstaff sold her flat to her son and daughter-in-law, who paid an arm’s length price for it, subject to an agreement which entitled Mrs Wagstaff to live in the flat rent free for the remainder of her life. She paid £5,000 for this right. The son and daughter-in-law then decided to sell the flat. If the arrangement had created a trust they, as the taxpayers, could claim Capital Gains Tax principal residence relief in respect of Mrs Wagstaff’s occupation. HMRC contended that no trust had been created – the taxpayers became absolutely entitled to the flat and the occupational rights granted to Mrs Wagstaff under the agreement were contractual in nature only.

The First Tier Tribunal sided with the taxpayers. They looked carefully at the purpose behind the agreement, what the taxpayers, as owners, could or couldn’t do with the flat as a result of the agreement, and how the taxpayers dealt with the flat when Mrs Wagstaff was no longer able to occupy it due to a fall. They noted that the agreement was designed to create binding legal obligations on the parties and that Mrs Wagstaff would have not parted with the ownership of the flat unless her right to occupy was secure. The only way to secure this was if the intended legal relationship was that of a trust.

The First Tier Tribunal noted that ‘it is not necessary to be able to point to some specific trust language. What should be clear from all the circumstances is an intention to create “trust obligations” and this will generally be easier to do when the subject matter and objects of the supposed trust are clear’. In an ideal world, documents will make it clear when they are creating express trusts. It is desirable that they do as the taxpayers must have incurred additional expense in bringing the appeal and were put at risk on costs because the agreement was not clear. But as we do not live in an ideal world, we have to be prepared not to take matters at face value. Perhaps, when it comes to construing documents, there is room for novelty after all.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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