Trust Reform (1): A Big Opportunity?
The Law Commission of England & Wales has included within its 13th Programme of Reform: Modernising Trust Law for a Global Britain.
The Law Commission states:
“ A trust is a way of managing assets. They are used widely by people and businesses. Trusts are a significant source of business for the City of London and many international corporations use English laws and courts to govern their arrangements.
“ But English trust law hasn’t been reviewed since 1925. And places like Singapore and New Zealand have reformed their laws to try and secure a bigger share of the market. Other countries have come up with new trust and trust-like structures to meet demand.
“ The (Law Commission) project will be a scoping study investigating English and Welsh trust law. The aim will be to see how the law can be modernised to benefit everyone. And to help ensure Global Britain’s trust services are competitive in the global market.”
Despite the plethora of jurisdictions offering their own trust laws, some of which closely follow English trust law, it is often suggested that there are far more trusts (whether commercial, public or private trusts) governed by English trust law than by any other jurisdiction’s trust law.
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Although trust law has been “tinkered with” since 1925, and many significant provisions brought into effect, this will be the first “root and branch” review for nearly a century. With the pace of change, though, whatever the changes now made, another full review may be required well before the start of the next century.
Most practitioners will welcome the modernisation of English trust law, provided that it does not change many of the settled issues – creating uncertainty and rewarding the industry with the excitement (and expense) of re-litigating questions that are “cast in stone” under the present regime.
The Law Commission observes that other jurisdictions “have come up with new trust and trust-like structures to meet demand” and looks for the proposed review “to help ensure Global Britain’s trust services are competitive in the global market”. This suggests the outcome might be for English trust law to adopt a range of differing structures which, alongside the traditional trust, can be used to help manage and preserve wealth as it cascades down the generations.
In order to compete with offerings from elsewhere within the Global community, it may be necessary to consider replicating those offerings in English law, so that we could see the likes of foundations, private purpose trusts and STAR or VISTA-type trusts being formalised within England & Wales. Whilst, potentially, an exciting prospect, the introduction of such wealth management vehicles will need the cooperation of HMRC to ensure that the innovation is not strangled at birth. In the run up to publication by the Law Commission of the Trusts (Capital and Income) Bill, it is understood that a number of the more radical proposals were omitted as HMRC may have used them to impose additional tax liabilities upon trusts (effectively making all trusts subject to the rate applicable to trustees).
In consulting on the introduction into English trust law of other trust and trust-like structures, the Law Commission will also force upon HMRC the need to consider how any such structures will be taxed under the UK tax system. This could result in, say, a standard approach to the taxation of all forms of foundation.
The opportunity may also be taken to provide statutory rules defining the extent to which a settlor may reserve powers to themselves without questions arising as to whether a trust has validly been created. A number of jurisdictions have “reserved powers” provisions which set clear boundaries. There may be a fine line to be drawn, though, to ensure that the extent of the powers that may be reserved to the settlor are not too wide – enabling HMRC to treat the settlor as having retained some form of economic interest in the trust fund upon which tax can be assessed.
A further challenge to the form of any new trust or trust-like structures that could be incorporated into English law will be the continual “global” push for transparency and disclosure. Could English law follow, say the Foundations (Jersey) Law 2009, under Articles 25 and 26 of which knowledge of a beneficiary’s interest, and information about the structure, might legally be withheld from them (but not from the tax authorities)? Although there are sound grounds for maintaining confidentiality where, say, a structure has been established to protect vulnerable, or potentially vulnerable, beneficiaries, it seems counter-intuitive to withhold knowledge of a structure from those who are intended to benefit from it.
Within this article, I have sought to comment upon some of the “big picture” aspects – I will separately consider more detailed aspects.
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