The illusion of appearance – Sham Trusts
It is not the purpose of this article to conduct an academic investigation into the issues surrounding sham trusts but to draw attention to the subject. Not only have schemes been used by the wealthy in order to avoid their tax obligations and hide assets they are also increasingly being sold as a means to seek to protect against, for instance, the imposition of care fees.
What are sham trusts?
There are a number of judicial definitions referring to what constitutes a sham. I prefer brevity and like the short but, in my view, helpful definition given by Lord Wilberforce in the case of W.T. Ramsey Ltd v Inland Revenue Commissioners  in which he said it was for the Revenue to find whether a document or transaction was genuine or a sham. He said:-
“In this context to say that a document or transaction is a “sham” means that whilst professing to be one thing, it is in fact something different.”
It is appears generally accepted that a document is a sham if it is not intended to be acted upon in accordance with the terms set out in it. Is the transaction simply “….a mere device or cloak…” and the intention of the settlor simply to continue to allow him/her to use the assets as their own? If the document or transaction is examined by a court it will look for the subjective intention of the parties to the agreement. Did the parties genuinely intend to create different rights and obligations or give a false impression?
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For the guiding principles it is helpful to consider the cases of Snook v London and West Riding Investments Limited  2 QB786 and HM Inspector of Taxes (Stone) v Hitch  EWCA Civ 63. More recent guidance can be found from decisions in relation to matrimonial disputes, such as ND v SD & Ors  EWHC 1507 (Fam).
If you feel the need to brush up on sham trusts and freezing injunctions the recent judgment of Birss J in the case of JSC Mezhdunarodniy Promyshelenniy Bank & Anor v Pugachev & Ors  EWHC 2426 (Ch) and its associated litigation make for interesting reading. Those who followed the case, or have recently come across it, will have observed that there was a strong New Zealand connection. The New Zealand judiciary has recently also been engaged in determining the issue of “illusionary trusts” an example of which is Clayton v Clayton  NZSC 29.
While these decisions may not make much new ground they are a reminder of the principles that the court will take into account whenever the issue of illusionary trust and transaction arrangements arise.
What are the principles?
As Lord Diplock said in Snook
“One thing I think, however, is clear, in legal principle, morality and the authorities…..that for acts or documents to be a “sham” with whatever legal consequences follows from them, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”
The test of intention is subjective and the court is not restricted to simply examining the trust documentation but can look at the parties conduct, explanations and any circumstantial evidence. That any agreement may be uncommercial or artificial does not automatically make it a sham but the court will seek to determine if the parties are bound by any other arrangement. Does the act or document fail to satisfy the “beneficiary principle” entitling the beneficiaries to invite a court to decree performance? What did the parties to the arrangement really intend?
What happens if a trust is found to be a sham?
Is the trust arrangement a “smoke and mirrors” attempt by the settlor to retain control of assets? The consequences of a finding that a trust is a sham and an illusion is that the terms cannot be relied upon, the settlor remains the owner of the assets and claims can be made against the assets, the settlor and the trustee(s).
Clearly what might constitute a sham trust or transaction has been shown to be relevant in the field of matrimonial disputes. Given that a good number of advisors suggest that family or business assets can be “wrapped up” in trusts in order to protect against enquiry; or the imposition of tax; or care fees; suggests that enquiries and litigation will increase.
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