What is the correct procedure for setting up a trust or for transferring a beneficial interest under a trust?
This is one of the more difficult areas of property law, because the subject is complicated by the efforts of the legislature to impose stamp duty on certain documents and by the efforts of property owners to avoid using documents if they can.
The basic position is easily illustrated by means of the following chart:
As will be seen from the above chart, generally speaking it is easier to create a trust than to transfer an interest from one beneficiary to another under an existing trust. Even a trust of land does not actually have to be declared in writing — it only has to be evidenced by writing (the actual declaration might have been an oral declaration). A declaration of trust relating to other property (eg shares) does not have to be in writing or supported by any written evidence at all. Thus it may be easier to create a trust of certain property than to transfer legal ownership of it (particularly in the case of shares, because a company will transfer ownership of shares only on the basis of a transfer form). However, once a trust has been validly declared, section 53(1)(c) of the Law of Property Act 1925 requires any “disposition” of an interest under that trust to be “in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing, or by will”.
The position is further complicated by section 53(2) of the Law of Property Act 1925, which states that “this section does not affect the creation or operation of resulting implied or constructive trusts”. These are two (not three) types of any trust which are of uncertain application and which exist independently of any expression of desire by any person to create such a trust.
Resulting trusts arise when the true intention of a property owner to transfer his property to another person is frustrated in some way and the courts are prepared to imply an intention on his part that the beneficial interest should revert to him, even if the legal title is temporarily in someone else’s hands.
A constructive trust arises when the courts desire to defeat fraud or to prevent unjust enrichment — where, for example, a purchaser buys trust property at below market value after bribing the trustees in order to do so. (Equity will impose a constructive trust on the land, enforceable against the purchaser, and a constructive trust on the bribe, enforceable against the trustees.)
An “implied trust” can be used as a generic name for both resulting trusts and constructive trusts or (more usually) as an alternative name for a resulting trust, since this type of trust depends upon the implied intention of the property owner to get his property back again if his primary purpose in transferring it to another person fails.
An example of a constructive trust defeating section 53(1)(b) arose in the famous case of Bannister v Bannister [8] 2 All ER 133. In that case, a vendor of a cottage sold it to the purchaser on the (unwritten) understanding that she (the vendor) could continue living in the house, rent free, for as long as she liked. The purchaser subsequently attempted to evict the vendor, and relied upon the fact that, if there was a trust in favour of the vendor, it had not been evidenced by writing under section 53(1)(b). The Court of Appeal held that section 53(1)(b) did not apply, because the trust was a constructive trust. It would have been a form of fraud for the purchaser to evict the vendor from the house after making a promise (written or oral) that the vendor could continue living there indefinitely.
However, although a contract to sell land creates a trust in favour of the purchaser, this type of trust does not defeat section 53(1)(b) or section 53(1)(c). The right to specific performance of the contract does not depend upon the existence of a trust — rather it is the availability of this remedy which entitles equity to construct the relation of trustee and beneficiary for certain conveyancing purposes (but not others). Thus, although the purchaser will have to show a sufficient written contract or memorandum for the purposes of section 40 of the Law of Property Act 1925, his remedy is a contractual remedy, not a remedy in the law of trusts. If, in lieu of a written memorandum, he has a sufficient act of part performance to substantiate an action for specific performance against the vendor, his justification for proceeding without written evidence is to be found in section 40(2) of the Law of Property Act 1925, not section 53(2).
This difficult point becomes clear from the decision of the House of Lords in Oughtred v Inland Revenue Commissioners [0] AC 206. In that case, Mrs Oughtred entered into a contract with her son on June 18 1956 to transfer 72,700 shares to him, in exchange for his giving up his reversionary interest in 200,000 different shares. This contract was an oral contract and could not, therefore, attract any stamp duty. (Stamp duty is a tax on documents, not a tax on transactions.) On June 26 1956, Mrs Oughtred and her son and certain family trustees completed this transaction by executing several documents. Among these documents was a transfer of the 200,000 shares to Mrs Oughtred. The Inland Revenue assessed this document to £633.50 stamp duty — 50p for the transfer of the legal title and £633 ad valorem stamp duty, being a tax on the value of the beneficial interest allegedly transferred by the document. Mrs Oughtred argued that the document was liable only to 50p stamp duty because the beneficial interest in the shares had already passed to her, in equity, by means of the oral agreement between her and her son.
The House of Lords held that the contract between Mrs Oughtred and her son merely gave her a right to compel completion of that transaction by means of an action for specific performance. It did not give her a right to avoid stamp duty on the document when it was finally executed in her favour (with or without specific performance being granted). Lord Jenkins relied upon the example of a contract for the sale of land. He said that, in such a case, a constructive trust will arise in favour of the purchaser but (so far as he knew) it had never been held that a conveyance subsequently executed in performance of the contract was free from ad valorem stamp duty.
An example of a resulting trust which failed to defeat section 53(1)(c) arose in the case of Grey v Inland Revenue Commissioners [0] AC 1. In that case, a Mr Hunter transferred 18,000 shares to trustees (including Mr Grey) directing them to act as nominees for himself. He therefore transferred legal title to the shares but did not part with his beneficial interest in those shares. He thus became a beneficiary under a resulting trust. Any stamp duty would have been nominal (50p), as no actual beneficial interest was transferred. Seventeen days later Mr Hunter directed the trustees to divide the shares into six parts and transfer them to certain pre-existing trust funds. He gave this direction orally so that there was no document which could suffer stamp duty. About five weeks later, the trustees executed deeds declaring that they held the shares on trust for the six pre-existing trust funds, and Mr Hunter became a party to these deeds (confirming his previous oral instructions to the trustees).
It was held by the House of Lords that the Inland Revenue was entitled to impose ad valorem stamp duty on these deeds. Mr Hunter’s oral direction had not been an effective transfer of his beneficial interest to his trustees. He was directing them to divert the beneficial interest away from himself and to dispose of it to other beneficiaries. This was, therefore, a disposition which had to be put into writing in order to comply with section 53(1)(c). Thus the first written document signed by Mr Hunter, confirming this previous oral direction, was, in law, the actual disposition of his interest under the resulting trust. Although the creation of a resulting trust might not require to be in writing (or to be evidenced by writing) because of section 53(2), there was no statutory immunity for dispositions of an equitable interest under a pre-existing resulting trust. Therefore the Inland Revenue had been correct to treat the deeds as a valid disposition of Mr Hunter’s beneficial interest in the shares and to impose ad valorem stamp duty accordingly.
The most perplexing question which arises on this subject is about the difference between Grey v Inland Revenue Commissioners (above) and Re Vandervell’s Trusts (No 2) [4] Ch 269 — where the Court of Appeal was more merciful to the taxpayer. It is a problem which defeats many students and in order to understand the decision of the Court of Appeal it is necessary to look at the complete history of Mr Vandervell’s dispute with the Inland Revenue. This began with Vandervell v Inland Revenue Commissioners [1967] 2 AC 291.
In 1949, Mr Guy Vandervell, a successful engineer, set up Vandervell Trustees Ltd and transferred money and shares to that company for the benefit of his children. In 1958, Mr Vandervell desired to give approximately £150,000 to the Royal College of Surgeons. He did this by transferring 100,000 shares to the college with an option in favour of Vandervell Trustees Ltd to be exercised within five years. His object in doing this was to allow the college to accumulate about £150,000 in dividends from the shares and then enable his trustee company to buy the shares for £5,000. Unfortunately, he did not make it clear to the trustee company what they were to do with the shares when they eventually obtained them. In 1961, the trustee company exercised the option, using £5,000 taken from the children’s trust fund. (By this time the trust company also held money for the benefit of Mr Vandervell’s employees.) In so far as the directors of the trustee company were entitled to have any view about the matter, it was clearly their intention to hold the shares for the benefit of Mr Vandervell’s children. However, the Inland Revenue refused to accept that Mr Vandervell had completely divested himself of the shares and they continued to demand surtax from him in respect of the dividends received by the Royal College of Surgeons. They also refused to refund any tax deducted at source, even though the college was a charity. Therefore, in order to avoid future tax demands in respect of the shares, Mr Vandervell not only ensured that the trustee company exercised the option, in 1965 he executed a deed disclaiming all rights in the shares and declaring that Vandervell Trustees Ltd held those shares on trust for his children. In 1967 he made a will making no provision for his children because they were “already provided for” and six weeks later he died.
The first case involved the Inland Revenue’s claim for £250,000 surtax on dividends declared on the shares between 1958 and 1961. The House of Lords held (by a majority of three to two) that Mr Vandervell’s intention in giving Vandervell Trustees Ltd an option to buy the shares from the Royal College of Surgeons was too vague to establish a binding trust in favour of other beneficiaries. According to Lord Upjohn and Lord Pearce, he probably intended the shares to be kept for such trusts as he himself, or the trustee company, should afterwards declare. According to Lord Wilberforce, he probably intended the shares to be kept for such trusts as he might decide at a later date. In either case, this was too vague to create any new beneficial interests, unless and until the new trusts should be identified or declared. Therefore, throughout the whole time the shares were registered in the name of the Royal College of Surgeons, Vandervell Trustees Ltd held an option to purchase the shares for £5,000, and (no other beneficial interests having been validly declared) this option was held by them on resulting trust for Mr Vandervell personally. Accordingly, Mr Vandervell had not divested himself of his entire interest in the shares and he was liable to surtax on the dividends.
Re Vandervell’s Trusts (No 2) concerned the period 1961 to 1965. According to the Inland Revenue, although Vandervell Trustees Ltd now owned the shares (not the Royal College of Surgeons), the position was then the same as in the first case. Mr Vandervell had not executed any document to dispose of his interest under the resulting trust which the House of Lords had identified in the first case. According to the Inland Revenue, the only way Mr Vandervell could divest himself of his remaining beneficial interest in the shares was to comply with section 53(1)(c) and execute a document disposing of that interest. As he did not do this until 1965, the Inland Revenue continued to charge surtax on the dividends until the date of that document. In order to test this claim, the executors of the late Mr Vandervell brought a test case against Vandervell Trustees Ltd seeking a declaration that Mr Vandervell was entitled to all the dividends paid between 1961 and 1965. The Court of Appeal held that, whatever uncertainty existed in the period 1958-61, that uncertainty had been brought to an end by the time the trustee company acquired the shares. The directors of the trustee company had bought the shares with £5,000 taken from the children’s trust fund and it would have been a breach of trust for the company to have held the shares for any other purpose. The directors had written a letter to the Inland Revenue showing the Revenue that this was their purpose. Moreover, any dividends received had been paid into the children’s trust fund with the agreement of Mr Vandervell himself. Clearly, Mr Vandervell had intended to bring his interest in the resulting trust to an end. It had not been necessary for him to express this intention in writing because “a resulting trust….is born and dies without any writing at all, it comes into existence whenever there is a gap in the beneficial ownership; it ceases to exist whenever that gap is filled” (per Lord Denning MR).
According to the Court of Appeal, Mr Vandervell was not disposing of a beneficial interest under a trust — he was creating a new trust. Since the property in question was not land, it was not necessary for him to use any documentation in creating this new trust.
It is clear, therefore, that very close attention has to be given to the precise circumstances in which a resulting trust arises and is afterwards replaced by the rights of another beneficiary. If (as in Grey’s case) the resulting trust was purposefully created, pending a disposition to another party, the disposition (when it comes) will have to be in writing. But if the resulting trust truly arises by operation of law, out of confusion, to prevent a gap in the beneficial interest, it seems that any subsequent clarification of where the beneficial interests are to lie will amount to the creation of a new trust. As such it will not have to be in writing under section 53(1)(c), and it will not need to be evidenced in writing under section 53(1)(b) unless land is involved.
Yet, despite this analysis, many lawyers maintain that Grey v Inland Revenue Commissioners and Re Vandervell (No 2) cannot both be right.
