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.