Can I Hold Shares on Trust in England and Wales?

You may be wondering how it is possible that a trust can own and hold shares. For instance, perhaps you have inherited shares in a family business, or you work for a company that pays you partly in shares held by a trustee. Alternatively, you may be interested in creating a trust to own shares on behalf of your family.

This article will first explain the principles behind trusts. It will then explain the process of creating a trust for shares. 

How Do Trusts Work?

Typically, if you own something, like a car, you have the right to do with it as you wish (as long as it is not illegal). So effectively, you can enjoy the car by driving it, selling it or giving it away to someone else. The law calls this “beneficial ownership” because you have:

• a “beneficial interest” in the property (the car), which refers to the fact that you can drive it, wash it, and treat it as you wish; and
• a “legal interest” in the property, which refers to your right to sell it or transfer it to someone else (“to dispose of”). 

The concept of a trust operates by splitting the two elements of beneficial ownership. It gives the legal interest to one person and the beneficial interest to another. 

Shares Owned by a Trust 

Nowadays, people commonly use trusts for estate and tax planning. This is because they provide a well-recognised means for the settlor to dictate what happens to their property if they wish for someone else to benefit from it. Likewise, a trust ensures protection over trust property from mismanagement. 

Indeed, you can use trusts to:

• protect family assets; 
• ensure a minor or someone unable to manage their own affairs will have their assets properly managed; and 
• tax-efficiently pass assets along to others in life, or after the owner dies, by minimising inheritance tax. 

Further, the three most common reasons you may hold shares in trust are:

• as part of an employee’s compensation package;
• to transfer to friends or family as part of your estate planning; and
• to allow a professional to manage your stock portfolio (“a bare trust”). 

Creating a Trust to Hold Your Shares

If you are interested in creating a trust, you should always seek the advice of a solicitor because the law surrounding trusts can be hard to understand. However, the process itself is fairly straightforward. 

Declaring the Trust

First, you will need to declare your intention to create a trust over the shares on behalf of the beneficiaries. You usually do this through a “trust deed.”  This is a legal document evidencing your intention to create a trust over shares. 

However, you may intend for someone else to have a beneficial interest in the shares. In that case, you will need to create a trust document evidencing your intention to create a trust. A solicitor should prepare this. 

Alternatively, suppose you intend for a financial adviser to maintain a portfolio on your behalf. In that case, part of the documentation you will sign will transfer the legal title of the shares to their name. 

As a general rule, once you create a trust, you cannot bring the trust to an end. In effect, you are splitting your beneficial ownership into the two elements and then transferring each portion to other people. Once this occurs, it is difficult to recall or take back ownership.

However, there are exceptions to note. For example, a financial professional might manage your shares, or it may be a situation where you can end the trust at any time and reclaim the legal interest in the shares. This is why it is referred to as a “bare trust”. 

Setting the Terms of the Trust 

Depending on your intentions, there are different reasons for wanting a trust to hold your shares. 

For example, you may want to:

• hold the shares on behalf of your beneficiaries for a certain period, such as when they turn a certain age, at which point they receive beneficial ownership; 
• hold the shares until the happening of some event, such as an employee working for the company for five years; or
• permit certain beneficiaries to only receive the dividend payments from the shares for their life, at which point another class of beneficiaries will get the beneficial ownership. 

As the next step, you may want to specify how exactly the trustee should manage the shares. For instance, should the trustee disperse share dividends as they issue them? Or, perhaps, the trustee should hold shares and reinvest them back into the trust funds. 

Choosing a Trustee

Following this, you need to choose a trustee. If you are creating a trust to hold company shares on behalf of friends or family, you will need to ensure that the trustee is somebody you can trust. For instance, you can choose another close friend or family member. 

The law recognises the importance of this role. Therefore, it imposes a particular kind of duty on trustees, called “a fiduciary duty”. 

Another option is that you hold the property on trust for the person you wish to enjoy the shares. You would effectively still be the legal owner of the property, but you would not be able to enjoy the benefit of the shares, such as receiving the dividends for your own use. 

Key Takeaways

It is possible to set up a trust to hold shares. Indeed, there are several reasons you may choose to do so. Commonly, shares in companies are held on trust for:

• estate and tax planning; 
• the purposes of an employee’s benefits package; and 
• expediency’s sake, such as if a financial advisor manages your share portfolio. 

Importantly, you should instruct a solicitor to create trusts over shares because trust law can be challenging to understand. If you do not execute the process properly, the law may not uphold your intentions. 

If you need help aligning your company’s interests with those of your estate planning, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us on 0808 196 8584 or visit our membership page.

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