Disposition of equitable interests PDF

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Week 10 - Lecture Notes...

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Disposition of equitable interests This element explores the formalities rules in s53(1)(c) Law of Property Act 1925 which relate to the disposition of subsisting equitable interests. Dealings with equitable interests As beneficiaries of trusts have equitable proprietary rights, they are able to deal with their equitable interests under the trust. There are four principal ways in which a beneficiary can do this: · A direct assignment to a third party · A direction to the trustee to hold the trust property for a new beneficiary · A direction to the trustee to transfer full legal ownership to a third party · A declaration of trust over the equitable interest (i.e. the creation of a sub-trust) This element considers the formalities requirements for dealing with an equitable interest under a trust. In particular, it considers which of the four methods above require compliance with s 53(1)(c) Law of Property Act 1925 (‘LPA 1925’). Section 53(1)(c) LPA 1925 Section 53(1)(c) of the Law of Property Act 1925 prescribes the formalities for the disposition of an equitable interest: ‘A disposition of an equitable interest subsisting at the time of the disposition must be in writing signed by the person disposing of the same or by his agent lawfully authorised in writing or by will.’ Effect of s 53(1)(c) LPA 1925 The following features of s 53(1)(c) are worth noting: s 53(1)(c) applies to all equitable interests. It should be considered whenever a beneficiary of a trust is attempting to transact with their equitable interest, regardless of the nature of trust property. In other words, it is not restricted to land. s 53(1)(c) requires the disposition to be in writing (not merely evidenced in writing). The effect of non-compliance is that the purported disposition is void. In other words, it is not possible to dispose of a subsisting equitable interest orally and then later evidence the disposition in writing. Section 53(1)(c) allows for signature by an agent but only if they have been given written authorisation for this.

What is a ‘disposition’? The element of s 53(1)(c) which has caused courts the most difficulty is the meaning of ‘disposition.’ The courts have had to consider whether various transactions by beneficiaries relating to their equitable interest were or were not a disposition of their interest. A direct assignment of an equitable interest by a beneficiary is a ‘disposition’ of that interest. This is uncontroversial. The law relating to directions by a beneficiary to a trustee is more complex. The two leading cases are Grey v IRC [1960] AC 1 and Vandervell v IRC [1967] 2 AC 291. Both involved attempts to avoid taxation. Grey involved a direction to the trustee to hold the trust property for a third party while Vandervell involved a direction to transfer full legal ownership to the third party. Grey v IRC FACTS: Trustees held shares on trust for Mr Hunter (‘H’). He orally directed the trustees to hold the shares on trust for his grandchildren instead. H’s intention was to transfer his equitable interest to his grandchildren by the oral direction. If he had transferred the interest by a direct written assignment, he would have incurred a significant tax liability. The Inland Revenue challenged the validity of H’s oral direction to the trustees, claiming that it was void for non-compliance with s 53(1)(c) LPA 1925. HELD: The oral direction was a purported disposition of H’s equitable interest in the shares and was accordingly void. The House of Lords reasoned that, as a matter of substance, there was no difference between a direct assignment to a new beneficiary and a direction to the trustee to hold the trust property for a new beneficiary. Both involve the transfer of an equitable interest from one person to another and both must comply with s 53(1)(c). Vandervell v IRC FACTS: A trustee held shares on bare trust for Mr Vandervell (‘V’). V orally instructed the trustee to transfer the shares to the Royal College of Surgeons, which the trustee did. The Inland Revenue argued that V had not divested himself of his equitable interest in the shares and was liable to pay income tax on their dividends. HELD: The transaction was not a disposition of V’s equitable interest in the shares. Rather, it had the effect of extinguishing that interest, which had merged with the legal title. In effect, V had collapsed the trust.

The outcome of this case can be summarised as follows: Where a trustee holds property on bare trust for a beneficiary, and the beneficiary instructs the trustee to transfer the legal title to a third party, intending the third party to become the full legal owner of the property, the transfer of the legal title carries the equitable interest with it. The transaction does not require any signed writing by the beneficiary because it is not a ‘disposition’ of their equitable interest. The difference between the Grey and Vandervell transactions can be represented by two diagrams. Grey v IRC Diagram alt text: On the left side of the diagram is a T above B1. On the right side of the diagram is a T above B2. There is a horizontal arrow leading from B1 to B2. In Grey, the legal title does not change hands. There is an equitable interest at the beginning and at the end of the transaction, but there is a change in the identity of the beneficiary. B2 is substituted for B1. Vandervell v IRC Diagram alt text: On the left side of the diagram is a T above B. On the right side of the diagram there is an X which is in line with the T. There is no letter below the X. There is a horizontal arrow leading from T to X and a diagonal arrow (upwards and right) leading from B to X. In Vandervell, the legal title does change hands. There is an equitable interest at the beginning but not at the end of the transaction. At the end of the transaction there is a full legal owner, X. There is no equitable interest and no beneficiary. Sub-trusts Where a beneficiary of a trust, A, declares a trust of their equitable interest under that trust for B, the trust created by A is called a sub-trust. Thus, the subject matter of a sub-trust is the equitable interest of a beneficiary under another trust. There is no direct authority on whether a declaration of a sub-trust amounts to a ‘disposition’ of the beneficiary’s interest under the principal trust. However, recent cases support the view that, where a beneficiary declares a trust of their equitable interest, they create a new trust, and thus a new equitable interest, in favour of the sub-trust beneficiary: Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358; Sheffield v Sheffield [2013] EWHC 3927. In other words, the declaration of a sub-trust involves the creation of a new equitable interest rather than the disposition of an existing equitable

interest. On this approach, s 53(1)(c) has no application to a declaration of a sub-trust. Summary · Dispositions of equitable interests can only be effected by signed writing · A direct assignment by a beneficiary of their equitable interest is a disposition of that interest · A direction by a beneficiary, B, to a trustee to hold their equitable interest on trust for X instead of B, is a disposition of the interest · A transfer of legal title by a trustee in accordance with a direction by a beneficiary, B, to transfer the legal title to the trust property to X, where B intends X to become the full owner of the property, is not a disposition of B’s equitable interest · A declaration of a sub-trust is not a disposition of the equitable interest of the beneficiary who declares the trust...