Introduction

As Hubert Monroe lugubriously commented in a Hamlyn Lecture ‘tax is scarcely a favourite topic’ (Intolerable Inquisition? Reflections on the Law of Tax (1981)1). It is not difficult to endorse this sentiment particularly when applied to the taxation of trusts. In academic contexts the topic conventionally falls into a no-man's land between the separate domains of taxation and trusts. Yet even by the beginning of the twentieth century the incidence of taxation was influencing the development of the private express trust. Indeed, as will be seen later in this book, taxation or more appropriately the availability of relief from taxation, has exercised considerable influence on public types of trusts also – for example, pension funds and charities (see Chapters 13, 18 and 19). With respect to private trusts, however, it may be claimed that this influence has so increased that fiscal considerations now dominate trusts practice even if not directly the formal rules of trusts law. Whether trusts should be created, what types of trust should be adopted and where their administration should be located are all, in reality, decisions taken by property-owners only after careful consideration of the fiscal implications.

The claim that these implications predominate will be probed later in this chapter (see p 72) but at the very least the taxpayer is unlikely to be satisfied with a tax lawyer or accountant who merely clarifies the probable size of the tax bill based on existing property arrangements.

Tax planning and the trust

What to the legislator and parliamentary draftsman can appear as a trust problem may simultaneously be to the tax adviser a means of achieving a tax-planning objective. In this first section we re-emphasise the peculiar facets of the trust that create this situation.

The basis of the trust's attraction for tax-planning is founded on the fundamental division of ownership between nominal title, benefit and control.

Introduction

On one level this chapter is simply concerned with completing the description of the necessary requirements for creating a valid express trust. This process provides a snapshot of the present rules relating to ‘certainty of objects’ and the ‘beneficiary principle’ whilst simultaneously identifying unresolved problems and teasing out inconsistencies. But as in other areas of law, the rules have not remained static and change here has been dramatic. Indeed in the last thirty or so years the courts have turned the world of ‘certainty of objects’ upside down and this dynamic aspect of law-making also deserves attention. A second level of study, therefore, is to examine the shifts that have occurred and to understand the how and why of change.

However, the starting place for this study has to be traced back much further, to the decision in Morice v Bishop of Durham (1804) 9 Ves 399. There Sir W Grant summarised the court's approach as follows:

Introduction

We have seen in Chapters 11 and 14 how the determination of the courts of equity to protect the interest of the beneficiaries in the event of trustee insolvency or misconduct was manifested in two ways in particular: (i) the separation of trust property from the insolvent's own assets; and (ii) the provision of the process of equitable tracing. Thus, property held by an insolvent or bankrupt person or company in trust for another is, with one exception, not available to the liquidator or trustee in bankruptcy to meet the claims of creditors. The exception is where an insolvent trustee has outlaid its own moneys in satisfaction of the trust's liabilities. A right of indemnity arises against trust assets for such liabilities satisfied on the trust's behalf (eg in running a business of the trust). This gives the trustee a proprietary interest in the trust assets, which may pass to a trustee in bankruptcy or liquidator for the benefit of creditors (see generally Hayton and Marshall at pp 780–788). In certain rare circumstances it has been held that property held on trust may be available to the liquidator to cover its costs if the insolvent's other assets are insufficient (see Chapter 14, p 000). The reasoning behind the fundamental principle that the insolvent's property does not include trust property is clear enough: trust property is beneficially owned not by the insolvent or bankrupt trustee, but by the beneficiaries.

Introduction

An agenda for change

In the previous chapter we observed that the nineteenth century had handed on a definition of charity based on the preamble to the Statute of Charitable Uses 1601 but encrusted with a luxuriant growth of case law. Despite several official and unofficial proposals during the twentieth century to reform and/or clarify the definition the legislature had until recently taken no major steps in this direction (see Colwyn Commission (Cmd 615, 1920) Pt III, s III, s xiv Nathan Report (Cmd 8710, 1952) paras 123–140; Report of the Radcliffe Commission on the Taxation of Profits and Income (Cmd 9474, 1955) ch 7; 10th Report of the House of Commons Expenditure Committee (HC Paper no 495 (1974–75) vol 1, paras 24–34; Goodman Committee Report Charity Law and Voluntary Organisations (1976) para 23 and App I). There had been an obvious opportunity for reform at the time of the Charities Act 1960 but this statute, while repealing the 1601 preamble, left the definition itself untouched (s 38(1)(4); see Marshall (1961) 24 MLR 444). The matter appeared to have been settled by the Conservative government in its 1989 review of the regulatory framework provided by charity law (Charities: A Framework For the Future (Cm 694, 1989). The opinion expressed in the Review was that any reformulation or attempt to give the definition statutory effect was undesirable: ‘There would appear to be few advantages in attempting a wholesale redefinition of charitable status – and many real dangers in doing so’ (para 2.17).

This book seeks to present the law of trusts in a different way from conventional texts. The underlying premise is that an investigation of the social and legal contexts in which trusts commonly appear, and of the functions which trusts perform within these contexts, is an essential prerequisite to a proper understanding of trusts law. Developments that have occurred in the relevant social and legal contexts since the first edition of this book have confirmed our conviction in the value of this approach. The bulk of the book is therefore again divided into four parts: trusts and the preservation of family wealth (Chapters 3–11); trusts and family breakdown (Chapter 12); trusts and commerce (Chapters 13–16); and trusts and non-profit activity (Chapters 17–20). The gathering pace of legal change has, however, impelled us to make extensive revisions and additions to the text. Prominent amongst the many statutory changes are the Trustee Act 2000 and the Pensions Act 2004 whilst key aspects of the Charities Bill 2004 have also been incorporated where possible. Important cases such as BCCI v Akindele, Foskett v McKeown, Schmidt v Rosewood and Twinsectra v Yardley, together with an outpouring of academic literature, have all in their different ways contributed to a continuing debate about trusts law, particularly in its relationship to other areas of the common law. The effect of these influences is evident in all four parts of the book.

Introduction

In the previous chapter we saw how the rule against perpetuities formally limits the time over which a settlor's freedom of disposition can be exercised. But it is implicit that, within that time and subject to the other public policy restraints mentioned in Chapter 6, a settlor is substantially free to dictate in the trust instrument both beneficial entitlement and the mode of trust administration. Plainly there would be little point in this freedom if the settlor's instructions could be ignored or altered at the whim of beneficiaries or trustees. Consequently, a fundamental principle of the law of trusts is that of fidelity to the settlor's intentions: trustees must faithfully implement that intention as identified through the trust instrument. The settlor is the law-maker, the trustees are the administrators of that law who must not deviate from the terms of the trust. In principle, therefore, the courts will not readily approve any deviation: ‘As a rule, the court has no jurisdiction to give, and will not give, its sanction to the performance by trustees of acts with reference to the trust estate which are not, on the face of the instrument creating the trust, authorised by its terms’ (Re New [1901] 2 Ch 534 at 544 per Romer LJ).

But neither settlors nor their advisers are imbued with the wisdom of Solomon, and they may fail to provide for unexpected developments such as unanticipated changes in investment patterns.

Introduction

Two previous chapters in this commercial section of the book (Chapters 13 and 15) have focused generally on the conscious use of a trust as a convenient method of achieving specific commercial objectives – thus falling within what was termed in Chapter 1 the ‘trust-twisting’ aspect of trust usage. The emphasis in this chapter shifts diametrically to the position where those engaged in some form of commercial activity may find themselves subject to fiduciary duties and, if in breach of those duties, may have imposed on them one or more of the equitable remedies, including constructive trusteeship, that the courts can call upon.

Consider the following examples of problems that might be encountered:

1. (1) Trustees appoint a solicitor, S, who, while carrying out their instructions, acquires confidential information about a company in which the trust fund has a substantial shareholding. Mistakenly believing that she has the trustees' and beneficiaries' consent, S acquires a large shareholding herself, reconstructs the company and makes a substantial profit for herself and the trust shareholding. A disgruntled beneficiary, whose proper consent was not obtained, claims that S's shares are trust property.

2. (2) A mining company, M, employs a geologist, G, to survey an area and report on any mineral deposits. G returns with relatively little information, but proceeds to stake claims to mineral deposits on her own behalf in the same area. M seeks to establish that the claims are rightfully its property.

3. (3) An employee of bank A mistakenly overpays a large sum of money to bank B. The mistake is discovered by B which takes no immediate action to rectify the position. B becomes insolvent and is put into liquidation before A discovers the error made by its employee. A wishes to recover the full amount overpaid.