Avoidance of duty through the floatation of a private business, was the driving force behind what some might describe as a text book error in accounting procedure, and one that on this occasion, left the owner (and his trusted colleagues) feeling less than savvy.

Having already positioned himself as a controlling shareholder, the director of a vibrant engineering company took steps to create a trust company, before appointing his three friends as trustees for the purpose of two previously created trusts.

When explained that making the firm open to public investment would attract increased wealth, the appellant expressed that he was now looking to set up another trust using 100,000 shares, in order to circumvent excess taxation through estate duty after his passing. 

The initial plan was that an employee trust could serve to not only benefit his workers, but help avoid the inevitable revenue claims; however, nothing went beyond the drafting stage.

After looking further afield, the appellant then chose to secure a pharmacology chair at a nearby surgical college, and set out to establish this at a cost of £150,000, as per the terms set by the institution.

When in many instances a simple cash payment would suffice, the appellant (under advisement by one of his accountant trustees), elected to have his bank transfer the shares to the college, whereupon dividends to the amount of £150,000 would be paid over a specific period.

With consideration of the plan to go public, the trustee then advised that the best course of action would be to request that the college allow for an option to repurchase the shares for a small sum, in order to prevent any concerns by potential stock market investors when assessing the pattern of ownership.

In light of this, the college were asked for their compliance, at which point they duly acquiesced, as their interests were purely fiscal.

This led to a deed of variation comprising payment of £145,000, followed by the immediate repurchase of the 100,000 shares for a sum of £5,000; after which, the property would be held upon trust by the trust company until such time as it would be decided by the trustees to place them in a suitable trust of their choice.

When carrying out the transfer, the bank were asked to leave the transferee name space blank, while following all other legal requirements for a successful gift.

It was made expressly clear by his letter, that the appellant had relinquished any interest whatsoever in the shares, and that the trustees were to act as they saw fit.

Upon receipt of the share certificates, the college signed themselves as shareholders, and were duly added to the company register, in accordance with company laws.

When the Inland Revenue learned of this transaction, it was claimed that the appellant had failed to act outside of his settlor obligations, and that under section 415 of the Income Tax Act 1952, it was declared that any income generated under a settlement paid to another person other than the settlor, and where the settlor has not released himself of his legal and equitable interest, the money will be construed as that of the settlor and taxed accordingly.

When brought before the courts, it was first found that the appellant had acted in error, and that liability to taxation was due.; however, when appealed the outcome was much the same, and so granted leave to present before the House of Lords, the judges took steps to examine the finer points of the transaction. 

While arguments as to section 53 of the Law of Property Act 1925 rested upon written dispositions (or a lack of it in this case), the root of the matter was more about the assignation of the shares, with the intention to recoup equitable and legal title upon the final dividend sum.

This was where the appellant contested that there had been no retention of interest, but rather an alternate means of investment and transferral to his trustees.

With a fiercely divided judgment, it was found on the facts that while the construction of a repurchase option was not entirely fatal to the existence of a disposition, the absence of a named transferee meant that until such time as one appeared, the shares and any revenue attached to them, remained the property of the appellant settlor.

Therefore, the implications of section 415 of the Income Tax Act 1952 remained in effect, and any undeclared revenue was now taxable, while the House reminded the parties that:

“The grant of an option to purchase is very different from a grant of a legal estate in some real or personal property without consideration to a person nominated by the beneficial owner.”


The creation of trusts run closely to dispositions of interest unless properly worded and executed in accordance with English law.

In this matter, the settlor elected to draft and duly sign a declaration of trust, while orally providing the exact nature of the trusts to his trustees; and so, it was this indiscretion that caused the Inland Revenue to seek proportionate stamp duty on grounds that the gesture amounted to a disposition of property and nothing less.

Having chosen to leave consideration for his grandchildren, the settlor created six trusts on two separate occasions, each leaving 3,000 company shares per beneficiary, along with particular instructions as to their use.

When looking to officialise his request, he brought together his trustees, before instructing them as how best to manage the trusts; and so, having finalised six declarations of trust, he signed and sealed them in witness of his solicitor.

A key part of his participation was that as of the date the deeds were completed, the settlor had agreed to renounce his continued beneficial, equitable (and therefore legal) interest in the trust property, and that the trustees were now holding them on trust for the benefit of his grandchildren.

Unfortunately, section 53 (1) of the Law of Property Act 1925 reads that:

“Subject to the provisions hereinafter contained with respect to the creation of  interest in land by parol, . . . (c) a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.”

The question then raised, was whether by virtue of their release, the actions of the settlor and the construction of the declarations of trust, were tantamount to voluntary dispositions, that under the terms of statute, attracted stamp duty (or ad valorem duty as referred to at the time), or that by lack of written instructions as to their use, the trusts were ineffective and thus exempt from taxation?

When first heard, the judge awarded in favour of the trustees, and cited that no duty was applicable because no ‘disposition’ had been intended nor indicated, except for the choice of words used by the settlor.

Upon appeal, the Court reversed the decision and took the opposing view that despite the intentions of the settlor, the manner in which the trusts were created altered the nature of the relationship between executor and trustee; inasmuch as the settlor had granted beneficial and equitable ownership to the trustees, and could no longer see himself as a trustee of the property, until such time as the grandchildren took title upon his death.

Presented again before the House of Lords, much greater focus was placed upon the consolidation of the Law of Property Act 1924 and The Statute of Frauds, which under section 9 explained:

“[A]ll grants and assignments of any trust or confidence shall likewise be in writing, signed by the party granting or assigning the same, or by such last will or devise, or else shall likewise be utterly void and of none effect…”

Statute of Frauds

The appellants relied this time upon the terms ‘grants and assignments’ to circumvent the requirements of the Law of Property Act 1925; on grounds that because the terms of the trust had failed to take written form, the trusts were both invalid and therefore exempt from duty, and that reliance upon the term ‘disposition‘ was an overextension of the facts and a misdirection of law. 

Upon generous consideration, it was unanimously agreed that despite the intimation that the actions of the settlor were misconstrued, it was relatively easy to interpret that the renunciation of interest was equatable to a disposition, and that under those circumstances, the relevant statutory duty was owed, while the House reminded the parties that:

“[A] direction to a trustee by the equitable owner of the property prescribing new trusts upon which it is to be held is a declaration of trust but not a grant or assignment.”