A UK taxpayer can be the trustee of a bare trust that holds money for a relative, without needing deeds or any other formal documents stating so, the UK’s First Tier Tax Tribunal has ruled.
A bare trust is a basic trust where, while having one or more formal trustees, the beneficiary has the right to the capital and assets, as well as any income generated by it.
The case involved a midwife called Lily Tang, whose parents-in-law lived in Hong Kong.
The bare trust was held in a bank account in Singapore, in which Tang had over $900,000 (£697,374; € 808,110). She was the trustee and her in-laws were the beneficiaries.
HM Revenue and Customs (HMRC) found out about it in 2013 via an information notice to the bank.
The dispute
HMRC started a discovery assessment against Tang, who claimed that she and her husband managed the trust on behalf of his parents, in accordance with their instructions.
The taxman was not satisfied and issued a further information notice, but Tang did not comply as her in-laws did not want their personal information and bank statements shared with HMRC.
She offered to pay £18,682 in instalments – a sum she believed was the total taxable amount had the money been hers.
HMRC rejected the offer.
The watchdog instead issued a £318,155 penalty for deliberate failure to notify, ranging from the 1998-99 tax year to 2015-16.
The sum was subsequently reduced to £55,718 with an additional £42,128 in penalties.
The court case
Tang appealed HMRC’s fine to the First Tier Tax Tribunal arguing that her account was held as a bare trust for her in-laws and that it was not taxable.
The trust was set up under an oral agreement between Tang and her in-laws, but no formal deed or documentation was available to back her claims up.
The Revenue hit back, saying that no trust could lawfully exist without written proof – but the tribunal sided with Tang.
The key factor was that the combined salaries of Tang and her husband would not have been enough to produce the sum present in the trust, supporting her claim that the money belonged to her husband’s parents.
Additionally, the in-laws provided statements confirming that the account was indeed a bare trust, and also produced bank statements showing that Tang had only managed the account according to their instructions.
The court’s decision was that the trust had clearly been created with Tang as a trustee, and that her unwillingness to provide bank statements for privacy and confidentiality was part of her duty to her in-laws.
International Adviser reached out to a tax lawyer who said that the tribunal decision could be applied to anyone not just family members, but this could still be appealed by HMRC.
If unchallenged, however, the ruling sets a precedent that bare trusts can be created without any written proof.
