When it comes to trusts, I could simply refer you to the Archers storyline: however, for those who missed Elizabeth’s explanation to the twins of how the trust over Lower Loxley Hall works, here is an alternative version…
The concept of trusts is peculiar to English law. Originating from the time of the crusades, landowners who had to leave their estates and families to fight abroad (and moreover, had no idea if or when they might return) created a device to ensure that their lands would be run smoothly in their absence and would still be there for them, were they to return. This device also enabled them to provide for their families in their absence and keep their tenants on the straight and narrow – so basically trusts are a mechanism for delegating responsibility and setting out rules according to which the property must be handled.
Later, trusts were used to protect landed estates from spendthrift heirs selling it all. Most recently, putting property in trust has turned out to be an excellent tool for tax and succession planning. Property held in a trust often attracts lower rates of tax than property owned absolutely by one person: the premise being that if you only have limited rights of ownership, then your exposure to tax should be similarly limited.
How a trust imposes these rules and makes them work is by recognising that in property of any sort there are actually two, not one, types of ownership: legal and beneficial. Trusts take property out of the absolute ownership of one person (who would otherwise be able to do with it as he wished) and instead, split up the ownership between two or more people so that neither side can make decisions without taking account of the other. Each side has a different role and different rules.
On the one hand is the legal owner: this is the person who would be named as the seller of the property in a transfer, or as the landlord in a lease. They are also the person who would be named on the Land Registry documents as the registered proprietor (the name of the beneficial owner does not appear at all). The legal owner has the power to buy, sell, mortgage and generally do anything that you might think an owner ought to be able to do. The only catch being they that may derive no personal benefit from it and this is the key to what makes a trust work. On the other hand then, is the beneficial owner. They are the person who is entitled to receive the rent the property makes, or live in it, or receive the sale proceeds. Any money received by the legal owner therefore, must be passed directly on to the beneficial owner, in accordance with whatever conditions regarding this are set out in the trust.
The legal owner is called the ‘trustee’ (the person to whom the property is entrusted) and the beneficial owner, the ‘beneficiary’ (the person entitled to benefit from the property). Although trustees are obliged to act in the best interests of the beneficiaries, in case they are tempted otherwise, there are normally at least two to keep tabs on each other.
So far, so good. Although there might be only be one beneficiary, there is more commonly a group of people (for example, a sibling group). Depending on the terms of the trust, the trustees may have power to decide who benefits and when, a ‘discretionary’ trust, or it the trust may fix a set order of who gets what and when. Stipulations can also be made regarding whether beneficiaries are entitled to income only (such as rents) and/or capital from sales. Likewise, restrictions can also be imposed on the trustees, limiting what they may do; for example, they may be prevented from mortgaging the property. All of these matters will be set out in the trust document usually a Declaration of Trust, or Settlement. There must also be a document, which actually transfers the legal title of the property to the trustees, on condition that it is held on the terms of the trust (like a normal sale, but with no money changing hands). This must be registered at the Land Registry, as for any other transfer.
When land is transferred to trustees to hold on trust, the Land Registry names them as the owners, but usually includes a restriction stating that any disposition of the land must be made by at least two trustees. This is to prevent fraud and to try and ensure that ‘good receipt’ is given for the sale proceeds i.e. that they will be passed on to the beneficiary. If buying from trustees it is vital to confirm that the restriction and the terms of the trust have been complied with.
To state what you have probably already worked out, trusts are a fantastically complicated area. Even beneficiaries living in trust property often do not know why it is not their name that should appear as landlord on a tenancy agreement, but rather the trustees’. To wit, I hope this goes some way to explaining a little of the background. If not (and if the Archers is not your cup of tea) try Jane Austen. She is full of pesky trusts causing problems. Just ask Mr Collins.
About Elizabeth
Despite being one who feels the cold,
Elizabeth braved a move to Northumberland and has worked there as a
solicitor with the firm of Dickinson Dees
LLP, in the Agriculture, Farms and Estates Team, where she started life
as a trainee in 2003. As part of this specialist and nationally
renowned team, she works both for a number of larger estates and trusts
on an ongoing basis and also on one-off matters, covering the range of
rural property law, including; sales and purchases, sporting
rights,rights of way, easements and tenancies, to name a few. Outside
the office, she nearly managed to get sent to the North Pole, loves the
occasional hunt with the CVNNH and continues to try and break the 4-hour
mark for a marathon. She lives with her husband, a terrier and a very
silly basset.
She can be contacted through Dickinson Dees on 0191 279 9000
