Implications of presumption

When assessing investment income for UK income tax, or the underlying asset for capital gains tax or inheritance tax, what matters is identifying who the beneficial owner is. The legal owner will be known to the world, but the beneficial owner may not be the same person. When the legal and beneficial ownership is formally split via an express trust, there are specific rules to tax the trustees. An express trust is one where the trust was deliberately established under ‘express’ terms, usually written down in a deed or will – everyone knows who they are, what they are doing and where the legal and beneficial ownership lies. These trusts are recognised by Her Majesty’s Revenue and Customs (HMRC) and effectively recognised by common law.

A bare trust is transparent for UK tax purposes, meaning the beneficiary is treated as owning the asset, even though they only hold the beneficial ownership. Bare trusts are usually created by deed. They are deliberate and intended, and parties know where they stand. Occasionally, however, a bare trust is not expressly and deliberately created by the parties; rather, it is imposed by the courts in the name of equitable principles. The parties’ intentions are presumed or equity demands that beneficial ownership be assigned to someone other than the legal owner to remedy an unconscionable action. This type of corrective bare trust is known as an ‘implied’ trust.

Implied trusts

‘If it is intended to have a resulting trust, the ordinary and familiar mode of doing that is by saying so on the face of the instrument; and I cannot get, out of the language of this instrument, a resulting trust except by putting in words which are not there’.^[1]

This quote, from Smith v Cooke, gives us a clue about the starting position of defining an implied trust. There is no written instrument outlining where the ownership is to lie, so the courts write words into the deed that are in accordance with the parties’ intentions, the principles of fairness and equity, or in the name of restitution. They are essentially in place to right a wrong or to recognise the true beneficial ownership in equity that was not forthcoming under common law.

Cook v Fountain laid down the modern distinction between express and implied trusts in 1676:^[2]

‘All trusts are either, first, express trusts, which are raised and created by act of the parties, or implied trusts, which are raised or created by act or construction of law; again, express trusts are declared either by word or writing; and these declarations appear either by direct or manifest proof, or violent and necessary presumption. These are commonly called presumptive trusts; and that is, when the Court, upon consideration of all circumstances presumes there was a declaration, either by word or writing; though the plain and direct proof thereof be not extant. In the case in question there is no pretence of any proof that there was a trust declared either by word or in writing; so the trust, if there be any, must either be implied by the law, or presumed by the Court.’^[3]

The imposition of an implied trust was traditionally a last resort. Lord Nottingham said:

‘The law never implies and the Court never presumes a trust, but in case of absolute necessity. The reason for this rule is sacred; for if the Chancery do take the liberty to construe a trust by implication of law, or to presume a trust unnecessarily, a way is open to the Lord Chancellor to construe or presume any man in England out of his estate’.^[4]

Resulting trusts

‘Presumed intention’ resulting trusts are those imposed by courts, looking at the presumed intentions of the parties and aiming to bring to fruition that intention. For example, that the person who advanced the money is the true owner and as such should be the beneficiary of that property held in trust by the legal owner; or that the transfer of an asset was not meant as a permanent gift, so the beneficial ownership remains with the original owner.

Another type of resulting trust is an ‘automatic’ one, which is borne primarily upon the failure of an express trust, when the title to a property remains with the settlor of the trust who has failed to effectively dispose of his property and fulfils the equitable maxim of ‘equity abhors a vacuum’ (i.e., someone must own the property). The automatic resulting trust takes the Latin word resultare (to ‘rebound’ or ‘spring back’) more literally by placing the ownership of a failed gift back into the hands of the original donor; the beneficial ownership is retained by the settlor, i.e., it is ‘never drawn off him’.^[5] The classic explanation, and indeed the origin of the description ‘automatic resulting trust’ was laid down by Justice Megarry:

‘The transfer to B is made on trusts which leave some or all of the beneficial interest undisposed of. Here B automatically holds on a resulting trust for A to the extent that the beneficial interest has not been carried to him or others.’^[6]

Constructive trusts

Constructive trusts are traditionally those imposed by law following an act of fraud or wrongdoing by individuals. In more modern times, the constructive trust has become a tool of the equitable/restorative concept of proprietary estoppel, whereby a promise, relied upon by someone to their detriment, has been reneged upon. The promise can be enforced and the unfortunate person who relied upon that promise can be given a beneficial proprietary stake in the property in question.

The basis of the ‘traditional’ constructive (derived from the word construe) trust was summed up nicely by Donovan Waters QC:

‘There is such a wide range of conflicting judicial and academic views, both as to the nature and the importance of the constructive trust in English law, that it is difficult to find two people who are in complete agreement. All the same, there is one point upon which all would agree. It is at least accepted by Courts and theorists that this trust is imposed by law, and that the intention of the parties, whom it affects, is consequently irrelevant.’^[7]

It is therefore unlike the resulting trust in that it is based upon a construal of the legislation and is arguably a remedy to any breach thereof. The traditional constructive trust also revolves around the relevant parties’ relationship being a fiduciary one. An early example of a constructive trust can be traced back to 1579, when the concept of constructive notice was imposed on vendors of leases who knowingly bought land, the freehold to which had already been bought.^[8] It is the ‘knowingly’ that is relevant: someone doing something that they know they should not. For example, somebody profiting from deliberate wrongdoing will hold their ill‑gotten gain as constructive trustees for their victims; or a shareholder who receives dividends knowing that the company has insufficient reserves will likewise hold that dividend as a constructive trustee for the company. If the individual acts in good faith with no malice aforethought, then they will not have constructive trusteeship imposed upon them.

Common‑intention constructive trust

The common‑intention or ‘new model’ constructive trust bases itself upon the presumed intentions and, therefore, has something in common with resulting trusts. This class of trust sets itself up as being a weapon in the hands of the equitable concept of proprietary estoppel; that the conduct of the parties meant it would be inequitable to deny the beneficiary use of the property as it went against their clear presumption that is equitable in the circumstances. Where the traditional constructive trust rights legal wrongs based on fiduciary relationships, irrespective of anyone’s intention, the new‑model constructive trust corrects equitable wrongs based upon presumed intentions and equitable principles of fairness and good conscience.

Lord Diplock’s statement in Gissing v Gissing laid the foundation for these ‘common intention’ constructive trusts:^[9]

‘A resulting, implied or constructive trust – and it is unnecessary for present purposes to distinguish between these three classes of trust – is created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land, whenever the trustee has so conducted himself that it would be inequitable to allow him to deny to the cestui que trust a beneficial interest in the land acquired ... and he will be held to have conducted himself if by his words or conduct he has induced the cestui que trust to act to his own detriment in the reasonable belief that by so acting he was acquiring a beneficial interest in the land.’

There is arguably some overlap between the equitable concept of proprietary estoppel and the constructive trust imposed to enforce it, per Yaxley v Gotts,^[10] where Lord Justice Walker stated that ‘the two concepts coincide’. However, Walker LJ reminded us in Stack v Dowden that the estoppel is a ‘mere equity, asserting an equitable claim against the conscience of the true owner’ whereas the constructive trust is ‘identifying the true beneficial owner or owners, and the size of their beneficial interest’.^[11] The cure to a proprietary estoppel claim can be anything the court sees fit to right the wrong. This can include a monetary award, as in Habberfield v Habberfield,^[12] where the youngest daughter was promised a stake in the farm’s dairy unit by her father; however, upon his death, he left the farm to his widow, who then closed down the dairy unit. The England and Wales Court of Appeal deemed a GBP1.17 million award by the England and Wales High Court suitable to undo her father’s going back on his promise. A constructive trust could presumably have been an option of the court, but various factors pointed towards the compensation. The common‑intention constructive trust is merely another tool in the court’s armoury.

Conclusion

Beneficial ownership is the key to UK taxation. More often than not, the beneficial and legal owners will be one and the same. If the ownership is to be intentionally split, then an express trust will exist and there are specific rules. However, the nature of the parties’ relationship and/or their relationship and conduct may lead to the ownerships being split by law and equity; in which case, that split may not be obvious. Tax advisors need to know where that beneficial ownership lies to know where the tax falls.