Trust creation – What is an express trust?
19 August 2021
19 August 2021
Barbara Gardener, Senior Consultant Tax and Trusts, Technical Connection Ltd
This article will cover some basic fundamentals of trust law that are essential before getting involved with advising clients on trusts.
Here we are already in August 2021 and there is still no sign from HMRC as to when the expanded trust registration service (TRS) for non-taxable trusts will become available (and so when will be the 12 month deadline for registration of existing non-taxable trusts). This was promised to be sometime this Summer; perhaps the Autumn (as advised by HMRC in their Agent Update) is more realistic.
The TRS aside, a recent meeting made me realise that there is a considerable number of young new advisers for whom my monthly musings about some specialist case law may be slightly over their heads. So, with no apology for trying to attract a younger audience this month, we will cover some basic fundamentals of trust law that are essential before getting involved with advising clients on trusts.
Some of these fundamentals are actually essential to understand how the expanded TRS is to work. Whilst we are used to the idea that trusts which have tax liabilities have to be registered with HMRC (this has been the law since 2017), which trusts or possibly trust-like arrangements will have to register even if they have no tax to pay? The legal requirement here is that only express trusts (which are not "excluded trusts") need to register. So, what exactly is an express trust? This is where we need to get back to the basic understanding of what is a trust and then to distinguish between express trusts and other trusts.
Creating a valid express trust
While it is usual for the trust to be evidenced in writing, there is generally no requirement that, to be valid, a trust must be in writing (although land settlements must be in writing). However, it must be certain which property is subject to the trust, who are the beneficiaries, and the words used must show clear intention to set up the trust. These are the so called “three certainties” of a trust. If any one of them is missing, for example at any time it is not possible to ascertain who exactly are the beneficiaries, the trust will fail.
The settlor can either transfer the property to the trustees or the settlor may declare themselves to be a trustee of the property. As things stand now, in England it is not even necessary to inform anybody, including the beneficiary, that a trust has been created, although this will change with the expansion of the TRS.
So, in effect, if a trust is created intentionally, and this could be by an express or inferred declaration, it will be an express trust.
Special requirements for the establishment of a valid trust apply in Scotland, including a requirement for delivery of trust assets to the trustees (which can be satisfied by intimation to the beneficiaries).
Useful guidance from HMRC - definitions
The recently published HMRC TRS Manual contains information on a number of areas such as registration requirements, information required to register and data retention, and HMRC has promised to add further material on related subjects, including more details on treatment of life insurance policies, deadlines, penalties and third-party information sharing provisions.
For our current purposes the Manual includes a very useful explanation of what an express trust is.
According to the Manual, an express trust is a trust created deliberately by a settlor, usually in the form of a document such as a written deed or declaration of trust. However a written document is not in fact necessary as is confirmed in another part of HMRC’s Manual (TSEM9510) which provides that an express trust is usually created by a declaration of trust which is made by the legal owner, but this declaration can be written or oral except in the case of land.
Cleary, if there is no written document there may be problems with providing evidence of the existence of the trust. In another part of the Manual, TSEM9550, HMRC states that there must be evidence of: the intention to create a trust, the beneficial interest in the property, and who holds the beneficial interest (i.e. the “three trust certainties” mentioned earlier); as well as the date from which such a trust is said to exist.
The Manual also confirms that there is no specific exclusion from registration for bare trusts. A bare trust (also called an absolute trust) is a trust where a beneficiary is absolutely and irrevocably entitled to both the income and capital of the trust. In general, if a bare trust is an express trust it should register on the TRS, unless it falls within the definition of excluded trusts. So, unfortunately, there is no concession for bare trusts, despite the fact that such trusts will never become taxable trusts as the trust income and gains are always taxed on the beneficiary (unless caught by the parental settlor provisions).
It is important to remember that bare trusts for this purpose would include irrevocably created nominee (designated) accounts where the beneficiary is other than the bare trustee, where the account was set up with the intention that the investment (often funded by monthly contributions) is held for a designated beneficiary (sometimes designated as the “beneficial owner”), such as a minor child. It is generally accepted that such arrangements are unlikely to be used for money laundering purposes, but, as things stand, they will have to be registered. Or is there still some hope that HMRC might reconsider this for such arrangements, when made for minor children, perhaps up to certain limits?
HMRC guidance and examples of express bare trusts
HMRC has previously confirmed that, in England and Wales, the legal and beneficial ownership may be separated by clear indication by name (or it may be separated by a valid declaration of trust).
HMRC also helpfully provided two examples of a simple written declaration that a bare trust exists, as follows:
"I John Smith declare that I hold the property described as XXXXX for my son David Smith absolutely", or
"I John Smith declare that I hold the property described as XXXXX on trust for my son David Smith".
The declaration will have to be signed by John Smith and dated. There is no need for David Smith, the beneficiary, to be even aware of the trust (at least until he reaches maturity). HMRC will accept such a declaration as evidence that a trust has been created, clearly, even if, as in the first example, the word “trust” is not mentioned. The property in question will normally be a bank account or an investment holding in John's name, usually (but not necessarily) designated with David's initials. Of course, John Smith could add any conditions that he wanted, e.g. that David should become entitled at age 25. It will still be a valid trust, but not a bare trust in such a case.
Of course, as mentioned above, bare trusts are not required to be registered for taxable purposes, because any UK tax liability is incurred by the beneficiaries (or the parental settlor, if relevant) rather than the trustees.
Trusts which are not express trusts – “implied” trusts
Express trusts can be contrasted with trusts that come into being through the operation of the law (be it legislation or a court decision) and that do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangement.
The first category of a non-express trust for our purposes is a statutory trust, such as one arising on intestacy in England. Such trusts do not have to register on the TRS if they are non-taxable.
The word “implied” is the commonly used antonym for “express”, although the word is used in several ways in legal terminology and indeed in legislation, which may sometimes be confusing and indeed some authors suggest avoiding it altogether.
The two types of “implied trust” include constructive trusts and resulting trusts. These are trusts that are implied by the circumstances and can be created only by a court that is trying to right a wrong or clear up a misunderstanding. Such trusts will not need to be registered with HMRC unless they become “taxable trusts”.
An "implied trust" should not be confused with an express but undocumented (e.g. oral) trust.
When advising clients on estate planning, if a trust is contemplated, then despite the fact that a trust can be created orally, it should always be recommended that a proper trust document (not necessarily a deed) is executed clearly stating the settlor’s intention, beneficial provisions and the terms and powers granted to the trustees - if only to avoid disputes and costly litigation.
With the expansion of the TRS, prospective settlors also need to be made aware that it will no longer be possible, in England, to simply make a declaration of trust and put it in a drawer. HMRC will have to be told, although, of course for non-taxable trusts, only the information in relation to the beneficial owners will be necessary.
As for the implied trusts, in practice, an adviser would rarely come across a resulting or constructive trust. However, statutory trusts arising on intestacy are very common. The next question for an adviser coming across such a trust will be: how do I deal with a trust where no trust document exists? We will come back to this question in a future article.
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