If the settlor [‘S’] attempted to transfer property [‘P’] to a trust, which legally did not belong to him, any such transfer will render the transfer and the trust invalid, because S had no authority to alienate P. Since preliminary matters such as title to P may need to be determined before the transfer, and ‘these issues are not of trust law, but of property and other law, the question of the law which governs this matter is the lex situs’ (‘Trusts And Related Tax Issues in Offshore Financial Law’, by Rose-Marie Antoine, paragraph 23.07).

Therefore, if the lex situs is England, then arguably, HMRC may challenge the validity of the transfer, and thus of the trust, as a preliminary issue in tax litigation, by seeking a declaration as to whether at the time of the purported transfer, S in fact had title to P under English property law.

A trust cannot come into existence until it has been constituted by an asset. If therefore the trust has been properly constituted and a subsequent transfer is invalid, that does not make the trust invalid.

If the first transfer is invalid, and therefore the trust was not contituted by that transfer, and a second transfer is made, and no other transfers were made, it may be possible to attack the second transfer as a sham, in which case, if the attack is successful, S remains the owner of all property transferred by him to the trustee, and the door is open to the bringing of claims against S and the trustee, for recovery of trust assets, compensation, and legal costs, see paragraph 7.8.3 of my book, the ‘Contentious Trusts Handbook.’

This potentially catastrophic litigation risk may therefore make mediation an attractive alternative to litigation.

If e.g. P is a work of art that S‘s separated wife alleges belongs to her, because S gave it to her, or that P was purchased using some of her money, then this could result in a claim for conversion, see my ‘Art Restitution Litigation in the English Court’ essay on the ‘Mediation of Art & Cultural Heritage Disputes’ page at www.carlislam.co.uk.

A claimant [‘C’] in an action for conversion does not necessarily need to show ownership of the chattel in question. C must establish that they had possession, or an immediate right to possession of P at the time of the conversion.

It therefore appears, that if S‘s separated wife brings a claim in conversion, S will end up being between a rock and hard place, because, if the claim in conversion suceeds, HMRC can apply for a declaration that the trust is invalid since the transfer was invalid. In which case P was never outside the UK tax net. Therefore if P is sold that will give rise to CGT. P may also qualify under the UK tax regime for Heritage Property. If the claim fails, HMRC may make a claim for unpaid tax (with penalties) as a result of the transfer of P to the offshore trust.

As the editors of the 2nd edition of ‘International Trust Disputes’ (2019) state in paragraph 17.27, ‘In trust disputes the structure of a settlement is often as important an issue as the financial terms. For example, is there to be a clean break or an ongoing trust? If an ongoing trust, how is that to be achieved and structured? These considerations are even more complex if the dispute involves a variety of trusts and beneficiaries with differing tax regimes. The advantages and disadvantages of potential routes to settlement are best considered in the calm space of the preparation phase rather than on the day of the mediation. Similarly, complex documents are best prepared subsequently. It may be helpful to have precedents available or even a draft settlement agreement if aspects of the structure can be agreed in advance.’

Where mediation is used as a process for innovative and bespoke lifetime estate and business succession planning, ideally a qualified tax adviser should be appointed to prepare an estate planning report (EPR) and a business succession planning report (BSPR).

These should be prepared after an inventory/schedule of the composition and value of the estate and family business has been prepared and before the mediator proceeds to interview each family member:
1. to confirm their acceptance of the facts set out in the inventory/schedule, so that from the outset all participants in the process are singing off the same song sheet; and
2. about what they each, want, need, prioritise and why.

In the case of an international family, their lawyers and tax advisers – appointed by the Family Office – can then engage with family members through a process of facilitated/mediated discussion to agree a holistic strategy and roadmap for practical implementation that is approved by each family member.

This may result in the drafting of a family constitution, and in the redrafting of the articles and memorandum of association of a family-owned company, a shareholders’ agreement and of an international trust deed which are no longer fit for purpose.

In contrast to the mediation of a dispute which will usually last between one and two days at the most, this process of dialogue, road mapping, and agreement, will take months, and can be accelerated if the mediator is assisted by a co-mediator.( See my article  ‘Back to the future’ – Part 2 – Mediation and Estate/Business Succession Planning. Taxation (Tolley) 08.03.2022 (to which there is a link on the ‘Publications’ page at www.carlislam.co.uk).