Sham trusts, revisited
Background
Trusts can fail for a variety of reasons, many of which will be familiar to law students on equity and trusts modules. A trust may be invalid for want of formality, such as a failure record in writing an agreement to declare a trust of an interest in land, which is required by section 53 of the Law of Property Act 1925. Alternatively, a trust may be invalid for lack of one of the “three certainties”: (a) intention of the settlor to create the trust, (b) clearly identifiable property or assets over which the trust is declared, and (c) the beneficiaries which the trust is intended to benefit.
A further reason for the invalidity of a trust is fraud or illegality. One aspect to this is the so-called ‘sham trust’, defined in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 by Diplock LJ (at p 802) as follows: “acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.”
Properly so understood, there is no such thing as a literal “sham trust”, but merely a document purporting to create a trust which does not in fact exist. However, an additional element to prove is the “shamming intent”, i.e. some finding of dishonesty. This is difficult to establish, due to the seriousness of the allegation. The burden of proof is of course on the claimant seeking to establish the trust is a sham. However, the standard of proof is the generic civil balance of probabilities test.
Sayers v Dixon
Sayers v Dixon [2025] EWHC 1886 (Ch) provides a modern example of a successful sham allegation. ICC Judge Barber also set out a helpful summary of the underlying principles of an allegation of sham.
The first defendant, Mr Dixon, was declared bankrupt in 2017. Six declarations of trust were executed by Mr Dixon in 2010, in which he purported to divest himself of all present and future assets in favour of his wife. He claimed to have no assets available in his estate since 2010 by virtue of these declarations of trust.
When executing the declarations of trust, Mr Dixon also entered into a loan agreement with his wife which provided his wife to loan back to him some of the monies signed over to her. The claimants were two joint trustees in Mr Dixon’s bankruptcy (the trustees). They alleged that the declarations of trust and the loan agreement were shams and sought an order setting them aside.
In his defence, Mr Dixon argued that all decisions relating to properties, such as whether to purchase, sell, let or renovate, were made by his wife. Further, the income from his consultancy roles were also received director by his wife’s company, and all family direct debits and standing orders were in his wife’s name and exited her bank account. His wife had, since the declarations of trust were executed, paid Mr Dixon modest amounts to meet incidental expenses as and when they arose. In addition, over £1 million from Mr Dixon’s income was invested by his wife into her business and directly managed by her.
Judgment
The Judge was satisfied that two out of six declarations of trust, as well as the purported loan, were shams. Relevant factors include that there was no change to Mr Dixon or his wife’s banking arrangements for years after the declarations were executed, and that between 2012-2018, approximately 56% of Mr Dixon’s income was retained in his bank accounts. Further, the declarations were not consistent with subsequent transactions carried out by Mr Dixon, such as a property purchase which he almost exclusively dealt with. Regarding the loan, the Judge held that not only was it never acted on, but it was not possible to perform due to the declarations of trust. If the declarations are taken literally, as they should be, Mr Dixon would never be able to repay the loans as he would have no assets from which to do so.
Mr Dixon’s wife was held to have the necessary intention as she simply ‘went along’ with the sham. Those who are reckless as to whether a document is honest/truthful, or who are wilfully blind to the same, are just as culpable as those who directly intend the sham. The remaining declarations of trust were not invalidated due to insufficient evidence.
Summary of the law
Paragraph [38] sets out a summary of the law concerning shams and is paraphrased loosely here:
• Where the declaration of trust is bilateral there must be a common intention that the assets are to be held otherwise than as set out in the trusts, but a party who goes along with a sham neither knowing nor caring what they are signing is to be taken as having the necessary intention.
• A unilateral declaration of trust may be a sham, where the person making it does not intend to divest themselves of their interest in the relevant asset but makes the declaration for the purpose of inducing third parties to believe that they do so.
• The fact that a transaction is artificial does not necessarily make it a sham, but may be a factor that can be taken into account when deciding whether it is a sham.
• There is a presumption that parties intend agreements to be effective, and that they intend to honour and enjoy their respective obligations and rights – the court should be slow (but not naively or unrealistically so) to find dishonesty.
• Evidence of subjective intention is admissible, including parties’ explanations and evidence of the parties’ subsequent conduct.
• A sham trust is void rather than voidable; however, even if void it stands until it is set aside.