Is this an Implied (Bare) Trust?

[robbie_arms]

Hi,

Good morning.

I have a real scenario here and would like some advice or opinions.

I need to know if this can be considered an implied bare trust by HMRC. The scenario and circumstances are described below.

The players are:
1. Father
2. Father's Friend
3. Son1
4. Son2

The events are as follows:
1. Father's Friend and Son1 purchased a property. Deposit was paid by Father and Father's Friend. Son1 did not contribute but was added to the legal title and mortgage. Legal title after this was Son1 and Father’s Friend. Purchased with declaration of ‘Held on trust for themselves’ in the TR1 transfer form. No other paperwork was made to formalise a trust.
2. Father lived in the property with 2nd wife and daughter. Paid all bills, council tax and mortgage repayments.
3. A few years later Father's friend wanted to return to home country and exit the legal title. Father returned his deposit contribution to his friend and Son2 was added to the legal title. Son2 did not contribute any money. So now the legal title is with Son1 and Son2. Transferred with declaration of ‘Held on trust for themselves’ in the TR1 transfer form. No other paperwork was made to formalise a trust.
4. A couple of years later, 2nd wife walked out / divorced and left with daughter. Father continued to occupy property, pay bills and council tax. Started to let out the spare room to maintain income for bills and mortgage payments.
5. Present day - Father continues to occupy and pay mortgage and bills. He is elderly (nearly 80) and wants security and somehow the property title transferred to himself.

The facts are:
1. Father never intended to gift the property to Son1 and Son2. The transfer declarations of ‘Held on trust for themselves’ was done to satisfy the mortgage conditions. (Granted this has misled the lender). There are no explicit documents/declarations of this intention.
2. Father never knew and was never advised about trusts. He always wanted at least 2 people on the title so one title holder cannot take unilateral action to sell the property or take over the property. There are no explicit documents/declarations of this intention. This was due to bad advice and naivete. Son1/Son2 just followed Father's instructions and never considered the future consequences/tax implications.
3. Son1/Son2 did not ever contribute or live in the property. Also, have not received any benefit from the property and never had control of the property.
4. Father is now willing to make any trust document and declaration of intentions. He wants the property as security in his old age. Has also expressed he may want to leave at least part of the property/estate to daughter (from 2nd wife). Son1/Son2 are in agreement and willing to transfer (if possible) the property to Father.
5. Property still has a substantial mortgage and Father has been refused a mortgage based on age.

My questions are:
• Is the above scenario an Implied Trust (bare trust), with Father as beneficiary and Son1/Son2 as trustees?
o In the absence of explicit paper trust deeds/documents, is there sufficient evidence in the conduct that this is an implied trust?
• How significant is 'held on trust for themselves' when deciding the status of the Implied Trust? Bear in mind that was the only way known at the time to get the mortgage. Granted the lender was misled.
• Is misleading the lender considered a separate transgression with separate penalty/reparation, or is it factored in when deciding the status of the trust?

Please let me know of any additional questions that need to be answered.

Many thanks for any advice.

[robbie_arms]

A clarification of Fact 1:
1. Father wanted a property to live in with 2nd Wife and daughter and never intended to gift the property to Son1 and Son2. The transfer declarations of ‘Held on trust for themselves’ was done to satisfy the mortgage conditions. (Granted this has misled the lender). There are no explicit documents/declarations of this intention.

[bd6759]

There canlt be an implied trust if there is a documented trust. " Purchased with declaration of ‘Held on trust for themselves’ in the TR1 transfer form"

[robbie_arms]

Thanks for your response.

So the property is seen as owned by Son1 and Son2.

Son1 wants to exit and relinquish his equity share. If he transfers his half to Son2 for no consideration I think there is a CGT trigger at half market value.

Is there any hold over relief type option where Son1 can defer the CGT to Son2? So he pays no CGT on transfer, but when Son2 disposes then the full CGT is paid then by Son2?

[bd6759]

There is no hold over relief for that transaction.

[robbie_arms]

Thanks again.

So what are the options?

Objectives are:
1. Son1 wants to exit without receiving any proceeds and therefore without CGT
2. Son2 wants to use the property's value to help pay for Father's care (expenses, health, hired help, facilities, etc)
3. When Father passes away, Son2 would keep remainder equity, or execute wishes of Father as he expressed interest in leaving an amo
unt to Daughter.

Also, the current market value of the property after mortgage loan is deducted is below £325k.

So what are the options?... is there any trust that can be created to achieve this? I have heard about discretionary trust.

Is there tax on a final disposal after father passes away? I presume so... but that is acceptable however would like to minimise it.

[someone]

Not read the whole thread but son1 can give to son2 over multiple years such that each year's gift is below the CGT allowance.

Not sure if you need it more quickly than that.

[AGoodman]

If the deposits and all the mortgage payments originated from father, and father, friend and sons always understood that the property was actually father's, I think you would have a reasonable argument for a resulting trust in favour of father. I don't think the TR1 (to which father was not a party) detracts from this.

This could be documented by a declaration of trust executed by father and sons confirming that father was source of payments, mutual intention was always that the property should be beneficially held for him and confirming that they hold the property for him. Father could confirm an indemnity to explain the mortgage payments he has and will make in the future.

This could be in breach of the mortgage terms (and would have to be disclosed for future mortgages) but does appear to at least represent the true situation.

[robbie_arms]

Thanks AGoodman, that's really interesting!

The parties are attempting to resolve the mortgage situation, i.e remortgage on correct terms. Son1 wants to leave as a 'trustee' and not have anything to do with the property and acknowledges that he has no claim and never expected that it was a gift to him.

So, in the scenario that this IS an implied trust, if Son1 transfers his share to Son2, and Son2 and Father go on to formalise/document a trust deed, is the transfer CGT free? i.e on the basis that a trustee is exiting.

[robbie_arms]

<"This could be documented by a declaration of trust executed by father and sons confirming that father was source of payments, mutual intention was always that the property should be beneficially held for him and confirming that they hold the property for him. Father could confirm an indemnity to explain the mortgage payments he has and will make in the future.">

Regarding the confirmation of indemnity, what form can this take? Is it a letter to the mortgage company from the Father/Beneficiary?