This recent judgment provides guidance as to what a trustee must consider when exercising a discretionary power of appointment and commentary on the distinction between bare and discretionary trusts.
Oco Limited and others v HMRC concerned two companies that established employee benefit trusts (EBTs) for particular employees and their families. The central legal issue was whether the companies had PAYE or national insurance contributions liabilities in relation to payments made to these trusts.
However, the judgment also contains a useful reminder of the law concerning sham trusts and appropriate considerations for trustees to take into account when exercising discretionary powers.
Oco Limited wanted to benefit particular employees in a tax efficient manner. It settled a discretionary trust in favour of those employees and the trustee later established sub-funds for individual employees and their families (although the full class of beneficiaries was broader).
Benefits were provided to the beneficiary employees in a variety of ways but predominantly by advancing loans to them.
The trusts were administered by a professional trustee.
HMRC argued that each sub-fund was in reality a bare trust for the respective employee beneficiary. The company contended that the trusts were discretionary.
HMRC also sought to apply the Antoniades/Autoclenz line of case law to have the trust deeds set aside as shams. Both of those cases were concerned with written contracts which at least one of the parties involved intended to be misleading as to the true terms of the agreement. They also dealt with situations in which one party clearly had greater bargaining power than the other.
The judge in Oco was not convinced that either issue made much sense in the context of a trust but he nevertheless considered whether the discretionary trust documents really reflected the terms of the trusts and whether the trustee's actions were consistent with a discretionary trust. He noted that:
- the employee beneficiaries generally understood that, although they were not the only beneficiaries of their respective sub-funds, those sub-funds would ultimately end up with the employees and/or their families. They accepted that there was a formal request and consideration process but regarded the money as theirs which they could access if they wished.
- the trustee recognised that the trusts were established as part of Oco Limited’s wider strategy for rewarding its employees.
- the trustee could not identify a situation where it had not complied with the company's wishes or a request from the employee beneficiaries.
- the trustee stated that it was likely to comply with reasonable requests made by either the settlor company or a beneficiary but could not give an example of what would constitute an unreasonable request.
Principles of case law
During his analysis the judge considered applicable case law and determined that:
- a power of appointment conferred on a trustee carries with it a duty to consider whether and how the power should be exercised
- as part of this, the trustee has a duty to consider:
- what persons or classes of persons are objects of the power (although this does not require them to compile a complete list or even know the precise number, they must simply have “an appreciation of the width of the field”)
- whether, in relation to a particular beneficiary, a particular exercise of the power is appropriate.
- the purpose of the trust will be pertinent in this consideration and it may be that an order of priority or preference for particular beneficiaries is clear from the terms of the trust. However, such an order of priority or preference may also be derived from knowledge acquired outside of the trust instrument.
- where, as in this case, it is clear that particular beneficiaries should be treated as the primary beneficiaries, it may be appropriate for the trustee to consider the appropriateness of a distribution to such a beneficiary without surveying the whole field.
Applying these principles to the facts
Having determined the above, the judge concluded that:
- the trust instruments accurately reflected the terms of the trusts
- the trustee’s behaviour was consistent with its duty to consider the exercise of its discretionary powers.
Although the trust documents did not specify principal beneficiaries, the purpose of the trusts (to benefit certain employees) was clear from the wider circumstances. Given this context it was open to the trustee simply to consider whether the beneficiary making the request was in fact entitled to benefit under the trust and whether the request was reasonable or in line with what the trustee might expect.
HMRC had contended that the trustee's consideration of each request was a mere pretence and cited the fact that no request had ever been refused as evidence for this. However, the judge concluded that the question that should be asked was not whether a trustee would refuse to comply with a request but whether, as the trust document and trust law require, the trustee would duly consider the exercise of their discretion. He thought that in this case the trustee would.
He noted that being unable to say what would constitute an unreasonable request did not mean that the trustee did not intend to consider its exercise of discretion each time a request was made. It also did not prevent the trustee from appreciating that it was not required to comply with every request.
Furthermore, the fact that the beneficiary employees considered the trust funds to be "theirs" and had not necessarily appreciated the true nature of the trusts was held to be largely irrelevant when determining whether the terms of the trust instruments reflected the true terms of the trusts. The judge pointed out that a trust is a complicated concept that may not be fully understood by a lay beneficiary. This does not mean that it is a sham or that the trust instrument should be disregarded.
Key points to take away from the case
The trustee of a discretionary trust is obliged to give due consideration to each exercise of their discretion in accordance with both the terms of the trust document and trust law more generally.
Oco serves as a reminder that:
- a trustee who in practice always acts in accordance with the wishes of a settlor or beneficiaries may nevertheless fulfil this duty if they follow appropriate steps when considering each wish or request
- where the purpose of a trust is clearly to benefit particular beneficiaries, it may be necessary to give only limited consideration to the interests of other beneficiaries.
Of course, what constitutes due consideration will depend on the circumstances and vary from case to case and specialist advice should be taken when considering what is appropriate.